What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-08 compared with 2020-07-06 · 457 added, 424 removed, 269 unchanged (77% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

MiMedx is an industry leader in advanced wound care and an emerging therapeutic biologics company, developing and distributing placental tissue allografts with patent-protected processes for multiple sectors of healthcare.

We derive our products from human placental tissues processed using our proprietary processing methodologies, including the PURION® process.

We employ aseptic processing techniques in addition to terminal sterilization to produce our allografts.

MiMedx provides products in the wound care, burn, surgical, orthopedic, spine, sports medicine, ophthalmic, and dental sectors of healthcare.

Our mission is to offer products and tissues to help the body heal itself.

MiMedx is an industry leader in utilizing birth tissue as a platform for regenerative medicine, developing and distributing placental tissue allografts with patent-protected, proprietary processes for multiple sectors of healthcare.

As a pioneer in placental biologics, we have both a core business, focused on addressing the needs of patients with acute and chronic non-healing wounds, and a promising late-stage pipeline targeted at decreasing pain and improving function for patients with degenerative musculoskeletal conditions.

We derive our products from human placental tissues and process these tissues using our proprietary processing methods, including the PURION® process.

We employ Current Good Tissue Practices, Current Good Manufacturing Practices, and terminal sterilization to produce our allografts.

MiMedx provides products primarily in the wound care, burn, surgical, and non-operative sports medicine sectors of healthcare.

All of our products are regulated by the FDA.

MiMedx is the leading supplier of human placental allografts, which are human tissues that are transplanted from one person (a donor) to another person (a recipient).

MiMedx has supplied over 1.9 million allografts, through both direct sales and consignment shipments.

Our biomaterial platform technologies include AmnioFix®, EpiFix®, EpiCord®, AmnioCord® and AmnioFill®.

MiMedx is a leading supplier of human placental allografts, which are human tissues that are derived from one person (the donor) and used to produce therapies to treat another person (the recipient).

MiMedx has supplied over two million allografts, through both direct and consignment shipments.

Our platform technologies include AmnioFix®, EpiFix®, EpiCord®, AmnioCord® and AmnioFill®.

AmnioFix and EpiFix are our tissue allografts derived from the amnion and chorion layers of the human placental membrane.

EpiCord and AmnioCord are tissue allografts derived from umbilical cord tissue.

AmnioFill is a placental connective tissue matrix derived from the placental disc and other placental tissue.

Our EpiFix and EpiCord product lines are promoted for external use, such as in advanced wound care applications, while our AmnioFix, AmnioCord and AmnioFill products are positioned for use in surgical applications, including lower extremity repair, plastic surgery, vascular surgery and multiple orthopedic repairs and reconstructions.

AmnioFill is a particulate product comprised of placental connective tissue matrix, derived from the placental disc and placental membranes.

Our EpiFix and EpiCord sheet product lines are promoted for external use, such as in advanced wound care applications, while our AmnioFix, AmnioCord and AmnioFill products are positioned for surgical applications, including lower extremity repair, plastic surgery, vascular surgery and multiple orthopedic repairs and reconstructions.

MiMedx has two primary distribution channels:

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and (2) sales through distributors.

This discussion, which presents our results for the fiscal years ended December 31, 2020 and December 31, 2019, should be read in conjunction with our Consolidated Financial Statements and the accompanying notes.

Also please refer to Item 1 — Business and Item 1A — Risk Factors, which include detailed discussions of various items impacting the Company's business, results of operations and financial condition.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes.

We also discuss certain performance metrics that management uses to assess the Company's performance.

Further information on the factors that can affect our operating results can be found in Part I under the caption “Important Cautionary Statement Regarding Forward-Looking Statements.”

Trends in Our Business

Demographic shifts are creating opportunities in the wound care space

The advanced wound care category is expected to continue growing due to certain demographic trends, including an aging population, increasing incidence of obesity and diabetes, and the associated higher susceptibility to non-healing chronic wounds.

Furthermore, the increasing number of patients requiring advanced treatment represents a significant cost burden on the healthcare system.

Our recent operating results have been burdened by the incurrence of significant legal expenses

Our prior results were adversely impacted by costs related to the Audit Committee Investigation and the Restatement.

We do not expect any further direct costs related those matters, but we have incurred and may potentially continue to incur legal expenses to indemnify certain former members of the Company’s management team in certain criminal and civil proceedings, as well as legal costs and penalties to settle ongoing matters involving the Company itself.

In January 2021, following the conviction of our former CEO and our former Chief Operating Officer (the “ Convicted Former Officers ”) for securities fraud and conspiracy to commit securities fraud, respectively, the Company filed suit seeking (1) a declaratory judgment that the Company has no further obligation to advance expenses to the Convicted Former Officers, (2) a refund of certain amounts previously advanced to the Convicted Former Officers, and (3) certain legal fees and expenses.

See Item 3, “ Legal Proceedings.

Our recent operating results were adversely affected by the impact of the COVID-19 Pandemic

Restrictions on access to hospital and health care provider facilities, decreases in elective procedures, and cost savings measures implemented by hospitals in response to the COVID-19 pandemic adversely affected our revenues, results of operations, and financial condition.

In certain areas, local or regional surges of COVID-19 have continued.

See “ Expected Impact of COVID-19 Pandemic, ” below.

Demographic shifts are creating opportunities in the advanced wound care and musculoskeletal sectors

The sectors where our products are used are expected to continue growing due to certain demographic trends.

Within the advanced wound care sector, there is significant unmet patient need, due to an aging population, an increasing incidence of obesity and diabetes, and other contributing comorbidities that result in higher susceptibility to non-healing chronic wounds.

These demographics extend into the musculoskeletal sector as well, and the increasing number of patients requiring advanced treatment represents a significant cost burden on the healthcare system.

We expect that these shifts will benefit our business.

As we look for ways to achieve long-term competitive advantages, we plan to continue to invest in research & development

We continue to evaluate these opportunities in alignment with our focus on advanced wound care.

We remain focused on advancing our BLA programs and are therefore aligning customer input, industry expertise, and additional resourcing toward seeking FDA approval for micronized dehydrated human amnion/chorion membrane (“ dHACM ”) for the potential indication to treat musculoskeletal degeneration across multiple indications.

In addition, we expect to incur additional costs to achieve compliance with evolving regulatory standards.

Certain areas of our business suffered as a result of the issues identified in the Audit Committee Investigation

The Investigation has caused us to incur significant legal fees, fines, and penalties.

Additionally, the Company has incurred significant costs in connection with the associated Restatement.

Negative publicity in the marketplace has created challenges for the Company in selling product to customers and retaining talented employees.

All of these matters have caused the Company to incur significant costs and have negatively impacted our financial performance.

We have incurred additional related costs in 2020 and expect to continue incurring such costs throughout 2020, including the possibility of settlement costs for existing contingencies.

Expected Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus (“ COVID-19 ”) as a global pandemic.

The Company is also focused on advancing our late-stage pipeline and accelerating efforts toward seeking FDA approval for AmnioFix Injectable, or mdHACM, to treat musculoskeletal degeneration across multiple indications.

As a significant area of focus and investment for MiMedx, we are progressing clinical, manufacturing, and quality initiatives, in support of mdHACM as a biologic with broad potential across a range of large and growing clinical indications.

In parallel, we are continuing to proactively communicate with the FDA.

We are preparing to request and schedule End-of-Phase meetings with the FDA to review our progress with ongoing clinical trials, and outline the proposed next steps, including plans to accelerate a Phase 3 clinical trial for knee osteoarthritis.

Also, our planned investments in Research and Development throughout 2021 are designed to advance our late-stage pipeline and support our core market growth objectives.

We intend to publish additional peer-reviewed clinical, scientific and economic data that further reinforce the differentiation of our products and expand the utility of the Company’s placentally-derived products in other clinical applications throughout the care continuum.

In addition, we are enhancing business and product development efforts, targeting new applications and potential products that fit within our framework of innovative technologies backed by rigorous science, that elevate the standard of care.

Impact of COVID-19 Pandemic

On March 11, 2020, the World Health Organization designated the outbreak of a novel strain of coronavirus as a global pandemic.

Governments and businesses around the world have taken unprecedented actions to mitigate the spread of COVID-19, including imposing restrictions on movement and travel such as quarantines and shelter-in-place requirements, and restricting or prohibiting outright some or all commercial and business activity, including the manufacture and distribution of certain goods and the provision of nonessential services.

As of the end of the first half of 2020, significant uncertainty exists surrounding the efficacy of these measures to mitigate the spread of the virus, in addition to uncertainty surrounding timing and availability of a vaccine.

The evolution of the outbreak, combined with these uncertainties, could result in the imposition of similar or greater restrictions for indefinite periods of time.

COVID-19 did not affect our financial condition and results of operations for the year ended December 31, 2019.

It began affecting us late in the first quarter of 2020.

As of the end of 2020, many governments and businesses have relaxed these measures.

In addition, the FDA has approved two vaccines with proven efficacy for use by the general public;

although, as of the issuance of this report, availability of the vaccine is restricted to certain populations.

Despite these developments, it remains uncertain whether governments and businesses will reimpose similar or greater restrictions or other measures to mitigate the spread of the virus, the rate at which the vaccine will become available to the general population, the potential impact of additional variants of the virus, the amount, timing, and extent of additional fiscal relief or stimulus, and the timing and extent society will return to a pre-pandemic way of life.

The COVID-19 pandemic began affecting us late in the first quarter of 2020 and affected our operations for the remainder of the year.

Sourcing and Manufacturing

We source the raw materials for our product from donors in hospitals.

We have a large, geographically-diverse network of donor hospitals.

We have a large, nation-wide network of donor hospitals.

We experienced interruptions to our access to some hospitals in some geographic areas beginning in the second half of March 2020.

However, we were successful in mitigating this disruption to our supply by adding additional donor hospitals, using third-party providers of donated placentas, and by increasing efforts at hospitals that did not impose access limits.

Additionally, in anticipation of expected disruptions, we ran manufacturing at levels greater than demand and have been successful in building our inventory of safety stock.

However, we were successful in mitigating this disruption to our supply by adding additional donor hospitals, increasing efforts at hospitals, and by using third-party providers of donated placentas, that did not impose access limits.

Additionally, in anticipation of expected disruptions, we ran manufacturing at levels greater than demand and were successful in building our inventory of safety stock.

We process donated tissue in a sterile environment.

However, the manufacturing space is a confined area where an affected employee might spread the virus to other employees despite the use of personal protective equipment required for this environment.

We monitor our employees’ temperatures prior to entering our facilities as of June 30, 2020 only three manufacturing employees and two sales representatives have tested positive for the virus, each of whom was isolated from our workforce.

Additionally, we required our non-manufacturing employees including our executives to work from home from March 13, 2020 until June 1, 2020, and we have continued to allow most employees flexibility in their work arrangements as a result of the pandemic.

Additionally, we required our non-manufacturing employees including our executives to work from home from March 13, 2020 until June 1, 2020, and again beginning July 12, 2020 through April 21, 2021, though this timeline may be further extended.

To the extent that employees do need to enter the facility, we monitor our employees’ temperatures prior to entering our facilities and ask if they are exhibiting any symptoms of COVID-19.

To date, and due to significant mitigation efforts, COVID-19 has had only a modest impact on our ability to source and manufacture our products.

Sales and Marketing

Our ability to sell our product has been hampered by the pandemic.

Our ability to sell our products has been hampered by the COVID-19 pandemic.

Our sales force is spread across the country.

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However, by mid-May, access to hospitals and healthcare providers by our sales force had been mostly restored, and we began to see significant numbers of patients return to hospitals and other healthcare providers, including for elective procedures.

However, as of early July 2020, additional restrictions have been put in place in some areas of the country that again limit or postpone elective surgical procedures, and in particular, in areas of the country that contribute a larger portion of our sales.

F uture sales will depend on patients’ willingness and ability to visit healthcare providers for care, and our sales force’ access to healthcare providers.

Also, the severity of the COVID-19 pandemic has been uneven across the country, and a second-wave outbreak of COVID-19 may have a greater impact on us than did the first wave depending on where infection rates are highest.

We are not able to estimate COVID-19’s future effect on patient behavior and consequently future demand for our products.

- Risk Factors - The COVID-19 pandemic and governmental and societal responses thereto have adversely affected our business, results of operations and financial condition, and the continuation of COVID-19 or the outbreak of other health epidemics could harm our business, results of operations, and financial condition.

This trend continued into the third and fourth quarters of 2020, where we saw net sales generally consistent with the comparable periods from 2019 on an “as-shipped” basis.

In certain areas, local or regional surges of COVID-19 have continued, and future sales will depend on patients’ willingness and ability to visit healthcare providers for care, and our sales force’s access to healthcare providers.

The timing, impact, and response to the pandemic has been uneven across the country.

Subsequent waves may have a greater impact than did the first wave depending on a myriad of factors, including, but not limited to the availability and efficacy of vaccines, the emergence and severity of new variants of the virus, infection rates, mitigation efforts, and societal response.

We are not able to estimate the future effect of COVID-19 on patient behavior and consequently future demand or the ability of providers to pay for our products.

- Risk Factors - The COVID-19 pandemic and governmental and societal responses thereto have adversely affected our business, results of operations and financial condition, and the continuation of the pandemic or the outbreak of other health epidemics could harm our business, results of operations, and financial condition.

Selling and General Administrative Expenses

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Beginning on April 5, 2020, we reduced employees’ salaries, including those of senior executives, on a sliding scale with larger reductions applied to larger salaries.

we intend for these reductions to last up to six months, and estimate that this initiative will save us approximately $18.6 million.

This has allowed us to reduce our expense base and reduce cash outlays, although we expect our margins to be temporarily reduced until sales return to normal levels.

Nevertheless, at the end of the first quarter of 2020 and continuing into April, we saw a reduction in the amount of cash generated by the business.

At May 31, 2020, our cash balance, net of minimum balance covenants set forth in our BT Loan Agreement, was $27.4 million.

The salary reductions ended June 28, 2020.

We estimate that the combination of these efforts have saved the Company approximately $17 million through December 31, 2020.

Liquidity and Capital Resources

On April 22, 2020, we executed the First Amendment (the “ Amendment ”) to our BT Loan Agreement with Blue Torch.

The amendment provided for an increase in the maximum Total Leverage Ratio (as defined in the BT Loan Agreement), which is a quarterly test, for the remainder of 2020, and also provided for a reduction in the minimum Liquidity (as defined in the BT Loan Agreement) requirement from April 2020 through and including November 2020.

Specifically, the maximum Total Leverage Ratio increased from 3 to 1 to 5 to 1 through December 31, 2020.

The minimum Liquidity requirement was reduced from $40.0 million to $20.0 million for April and May 2020, and from $30.0 million to $20.0 million for June through November 2020.

In connection with the Amendment, we agreed to pay a one-time fee (the “ Amendment Fee ”) of approximately $0.7 million , added

to the principal balance, and a one percentage point increase in the interest rate to LIBOR plus 9% .

See “ Recent Events ” section below for discussion on the financing transactions.

In addition, the Amendment loosened restrictions on our ability to borrow additional funds;

enabling us to borrow up to $10 million under the Paycheck Protection Program (the “ PPP Loan ”) offered by the U.S.

Small Business Administration under the Coronavirus Aid, Relief, and Economic Security Act.

We applied for the PPP Loan prior to obtaining the aforementioned amendment to the BT Loan Agreement, and received the proceeds of the PPP Loan on April 24, 2020.

On May 8, 2020, we received a letter from the U.S.

House of Representatives’ Committee on Oversight and Reform’s Select Subcommittee on the Coronavirus Crisis requesting that we return the proceeds of the PPP Loan so that the funds earmarked under the program could be used by smaller companies with more limited access to the capital markets.

We repaid the PPP Loan in full on May 11, 2020.

On June 30, 2020, we entered into a Loan Agreement with, among others, Hayfin Services, LLP, an affiliate of Hayfin Capital Management LLP, which was funded on July 2, 2020 and provided us with a senior secured term loan in an aggregate amount of $50 million and an additional delayed draw term loan in the form of a committed but undrawn facility.

In addition, on July 2, 2020, we issued shares of Series B Preferred Stock to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP pursuant to the Securities Purchase Agreement for an aggregate purchase price of $100 million (collectively, the “ Financing Transactions ”).

The proceeds from these transactions were used to:

(1) refinance, in whole, the outstanding indebtedness under the Loan Agreement, dated as of June 10, 2019, among us, the lenders and Blue Torch Finance LLC as administrative agent and collateral agent for such lenders,

(2) pay fees and expenses incurred with certain financing transactions, and

(3) finance the working capital, capital expenditures, and other general corporate obligations of the Company.

In large part due to the Financing Transactions, we have $95.8 million of cash and cash equivalents and $101.5 million of working capital as of December 31, 2020.

Despite the uncertainty brought upon by the COVID-19 pandemic, we believe that our current cash balance, in concert with cash flows from operations, as well as $25 million available on the delayed draw term loan, will be sufficient to cover our obligations for twelve months from the filing of this Form 10-K.

As noted above, the COVID-19 pandemic has affected our operations and may continue to negatively affect our operations.

It is possible that, as a result of a deterioration of our operations, we may breach one or more of the financial covenants specified within our term loan agreements.

Such a circumstance would constitute an event of default and could allow our lenders to call outstanding loans and require us to repay the outstanding principal balance, accrued interest, and prepayment premium immediately.

Absent this circumstance, our lenders may require us to pay a higher interest rate on our debt so long as we remain in default on our loan agreements.

Either circumstance could impact our cash flows or liquidity.

The COVID-19 pandemic and governmental and societal responses thereto may cause a deterioration of debt and equity markets, limiting our ability to access capital should the need arise.

If we do seek additional financing through the capital markets, it is possible that the terms of such agreements may be less favorable than the terms of our existing term loan

This could be the result of factors specific to our operations or systemic to the capital markets brought upon by the COVID-19 pandemic.

Refer to discussion in the Liquidity and Capital Resources section below for additional information regarding the Financing Transactions.

Reserves and Financial Estimates

We do not expect that there be significant changes in judgments in determining the fair value of other assets measured in accordance with U.S.

As a result of the pandemic, we do not expect to incur any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements, although we expect our days sales outstanding, post revenue recognition transition discussed in the “Critical Accounting Policies” below, to increase modestly as a result of patient behavior.

The uncertain future impacts of COVID-19 make it difficult for us to forecast future results.

This is not helpful when seeking capital, but we are not otherwise able to quantify the effects of COVID-19 on our ability to obtain additional capital.

We do not expect that there will be significant changes in judgments in determining the fair value of other assets measured in accordance with U.S.

We do not expect to incur any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, fixed assets, or right of use assets) as a direct result of the pandemic, increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on our financial statements, although we expect our days sales outstanding, post revenue recognition transition discussed in the “ Critical Accounting Policies ” below, to increase modestly as a result of patient behavior.

Financial Reporting Systems and Internal Controls

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Recent Events

FDA Guidance and Enforcement Discretion

In November 2017, the FDA published a series of related guidances, including one entitled “ Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue-Based Products:

Minimal Manipulation and Homologous Use–Guidance for Industry and Food and Drug Administration Staff ” that established an updated framework for the FDA’s regulation of cellular and tissue-based products.

Among other things, the guidances clarified the FDA’s views about the criteria that differentiate Section 361 HCT/Ps from Section 351 HCT/Ps.

As described elsewhere in this Form 10-K, the guidances clarified the FDA’s expectation that certain products, such as micronized products that MiMedx has long marketed as Section 361 HCT/Ps, will be treated as Section 351 HCT/Ps moving forward.

The guidances also confirmed that amniotic membrane in sheet form generally can be characterized as “minimally manipulated” and therefore regulated solely under Section 361.

The guidances stated that the FDA intends to exercise enforcement discretion under limited conditions with respect to the IND application and pre-market approval requirements for certain HCT/Ps through November 2020.

This means that, through November 2020, the FDA does not intend to enforce certain provisions as they currently apply to certain entities or activities but provided no assurances.

The FDA intended this period of enforcement discretion to give sponsors time to evaluate their products, have a dialogue with the agency and, if necessary, begin clinical trials and file the appropriate pre-market applications to transition products that had been marketed as Section 361 HCT/Ps into compliance with Section 351.

The FDA’s approach is risk-based, and the guidances clarified that high-risk products and uses might be subject to immediate enforcement action.

We have continued to market our micronized products under this policy of enforcement discretion while at the same time pursuing BLAs for certain of our micronized products.

For more information, refer to Item 1, “ Business–Overview ” and “ Government Regulation, ” and Item 1A, “ Risk Factors ,” under the heading “ To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of new tissue products more expensive and significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements .”

BLA Development Effort

As part of our BLA development effort, we have also made efforts to transition our manufacturing establishments into compliance with cGMP.

During the enforcement discretion period, the FDA is permitting products that will become Section 351 HCT/Ps to be manufactured in compliance with GTP regulation.

However, after the end of the enforcement discretion period, these products will be subject to cGMP compliance.

The transition from GTP to cGMP compliance includes development and enhancement of production processes, procedures, test and assays, and it requires extensive validation work.

It can also involve the procurement and installation of new production or lab equipment.

These efforts require human capital, expertise and resources.

The Company is developing and enhancing systems to meet these requirements, and expects to complete those efforts by November 2020, though there is no guarantee that the Company will be able to meet the requirements on that timeline or at all.

For more information on our clinical trials, BLA development effort, and FDA enforcement discretion, see the section entitled “ Business–Government Regulation .”

Coronavirus Aid, Relief and Economic Security (CARES) Act

On March 27, 2020, the “ Coronavirus Aid, Relief and Economic Security (CARES) Act ” (the “ CARES Act ”) was signed into law.

The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, loans and grants to certain business, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

We applied for and received a $10.0 million loan under the PPP loan.

On May 11, 2020 we completed the repayment of the PPP Loan.

In addition, modifications to the tax rules for carryback of net operating losses are expected to result in an estimated federal tax refund of $11.3 million and a resulting income tax benefit.

SEC Matters and Corporate Matters

On March 17, 2020, we filed our annual report for the year ended December 31, 2018 which included restated financial statements.

On July 6, 2020, we filed our annual report for the year ended December 31, 2019, three quarterly reports for 2019, and our quarterly report for the period ended March 31, 2020.

By doing so, we became current in our periodic reporting obligations with the SEC.

We also held our 2019 annual meeting of shareholders on August 31, 2020 and our 2020 annual meeting of shareholders on November 20, 2020.

Relisting of Common Stock and Related Matters

On November 4, 2020, The Nasdaq Stock Market LLC (“ Nasdaq ”) relisted our common stock (“ Common Stock ”).

Previously, Nasdaq had suspended our Common Stock from trading on November 8, 2018 and subsequently delisted our Common Stock effective March 8, 2019 due to our failure to remain current in our SEC reporting obligations.

Additions to our Management and Board of Directors

Since June 2018, most of our executive leadership team has changed.

• The Board appointed Timothy R.

Wright as Chief Executive Officer, effective as of May 13, 2019.

• On December 2, 2019, William “Butch” Hulse IV joined the Company as General Counsel and Secretary.

• Effective March 18, 2020, the Board appointed Peter M.

Carlson as Chief Financial Officer.

• On May 1, 2020 the Board appointed William L.

Phelan as Chief Accounting Officer.

• On July 28, 2020, the Board appointed Rohit Kashyap, Ph.D.

Executive Vice President and Chief Commercial Officer.

• On August 10, 2020, the Board appointed Robert B.

Stein, M.D., Ph.D.

Executive Vice President, Research and Development.

In addition, we welcomed four new directors to our Board of Directors in 2020.

Pursuant to the Preferred Stock Transaction described below, we increased the size of our Board of Directors, and Martin P.

Sutter and William A.

Hawkins III were appointed to serve as Preferred Directors effective July 2, 2020.

At the 2020 Annual Meeting held on November 20, 2020, shareholders elected Dr.

Michael Giuliani and Dr.

Cato Laurencin to the Board.

Phyllis Gardner will join the Board effective immediately following the filing of this report.

As a result, all of our current directors have joined the Board as new members since May 2019.

Financing Transactions

On July 2 , 2020, the Company issued $100 million of Series B Preferred Stock to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP pursuant to the Securities Purchase Agreement for an aggregate purchase price of $100,000,000.

Also on July 2, 2020, the Company borrowed an aggregate of $50 million and obtained an additional committed but undrawn $25 million facility pursuant to the Hayfin Loan Agreement.

See Item 9B, “ Other Information.

” A portion of the proceeds of the Preferred Stock Transaction and the Hayfin Loan Transaction was used to repay the outstanding principal balance of $72.0 million, accrued interest and fees of $0.1 million, and prepayment penalty of $1.4 million under the BT Loan Agreement.

The Company also terminated the BT Loan Agreement on July 2, 2020.

For further information regarding the Preferred Stock Transaction, the Hayfin Loan Transaction and the termination of the BT Loan Agreement, see Item 9B, “ Other Information.

On July 2, 2020, we issued shares of our Series B Convertible Preferred Stock, par value $0.001 per share (the “ Series B Preferred Stock ”), to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP pursuant to the Securities Purchase Agreement, dated as of June 30, 2020 (the “ Securities Purchase Agreement ”), for an aggregate purchase price of $100 million (the “ Preferred Stock Transaction ”).

On July 2, 2020, we also borrowed an aggregate of $50 million pursuant to the loan agreement, dated as of June 30, 2020 (the “ Hayfin Loan Agreement ”), by and among the MiMedx Group, Inc., certain of our subsidiaries, Hayfin Services LLP and other funds managed by Hayfin Capital Management LLP, and obtained an additional committed but undrawn $25 million facility pursuant to the Hayfin Loan Agreement (collectively, the “ Hayfin Loan Transaction ”).

A significant portion of the proceeds from these transactions was used to repay the outstanding balance of principal and accrued but unpaid interest, and prepayment premium, under existing indebtedness.

For further information regarding the Preferred Stock Transaction, see Item 8, Note 10 “ Equity .” For further information regarding the Hayfin Loan Agreement and the repayment of our prior indebtedness, see Item 8, Note 8 “ Long-Term Debt.

Government Investigations and Litigation

On April 6, 2020, we announced that we had finalized a settlement with the Department of Justice (the “ DOJ ”), resolving an investigation concerning the accuracy of commercial pricing disclosures to the United States Department of Veterans Affairs (the “ VA ”) for one of our products in connection with our Federal Supply Schedule contract, and a related qui tam action filed in Minnesota.

We self-disclosed the matter to the VA Office of Inspector General (VA-OIG) in November 2018, prior to our knowledge of the qui tam suit or any underlying government investigation and, as the DOJ acknowledged in the settlement agreement, we cooperated with the government’s investigation into the matter.

Without admitting the allegations, we agreed to pay $6.5 million to the DOJ to resolve the matter.

Previously, we disclosed that we had accrued an amount to cover the settlement and anticipated related expenses in our annual report on Form 10-K for the year ended December 31, 2018.

On January 11, 2021, we provided an update regarding the United States Attorney’s Office for the Southern District of New York (“ USAO-SDNY ”) Investigation into, among other things, our recognition of revenue and practices with certain distributors and customers.

The USAO-SDNY recently advised us, based on the USAO-SDNY’s current understanding of facts, that it does not intend to pursue further action or remedies against us.

On September 9, 2020, we reached a settlement of three shareholder derivative actions ( Evans v.

Petit, et al.

filed September 25, 2018, Georgalas v.

Petit, et al.

filed September 27, 2018, and Roloson v.

Petit, et al.

filed October 22, 2018) that had been filed in the Northern District of Georgia.

On December 21, 2020, the Court approved the settlement.

Pursuant to the Florida Business Corporation Act and indemnification agreements with its former Chairman and CEO, Parker H.

“Pete” Petit, and former COO, William Taylor, the Company has advanced defense costs to Petit and Taylor in connection with certain legal proceedings arising from their corporate status as former directors and officers of the Company.

Following the jury verdict against Petit for securities fraud and Taylor for conspiracy to commit securities fraud, on January 12, 2021, the Company filed suit in the Eleventh Judicial Circuit of Florida in and for Miami-Dade County ( MiMedx Group, Inc.

Petit and Taylor ) seeking (1) a declaratory judgment that a conviction of Petit and Taylor means the Company has no further obligation to indemnify or advance expenses to them, (2) reimbursement of amounts previously advanced to Petit and Taylor, and (3) any other relief deemed just and proper by the court.

Given the inherent difficulty of predicting the outcome of litigation, the Company cannot estimate recoveries, ranges of recoveries, losses or ranges of losses in these proceedings, nor can it predict whether it may be required to continue to indemnify or advance defense costs to Petit and Taylor.

For more information see the discussion included in Item 8 -- Note 14, “Commitments and Contingencies.”

Critical Accounting Policies

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Revenue Recognition

We sell our products primarily to individual customers and independent distributors (collectively referred to as “ c ustomers ”).

Current Policy

We sell our products primarily to two classes of customers:

individual customers and independent distributors.

Customers obtain and use products either through ship and bill sales or consignment arrangements.

Under ship and bill arrangements, we retain possession of the product until the customer submits an order.

Upon approval of the sales order, we ship product to the customer and invoice them for the product sold.

Under consignment arrangements, the customer takes possession of the product, but we retain title until the implantation, or application of our product to the end user.

Subsequent to the Transition (as defined below) and including for all of the year ended December 31, 2020, we recognized revenue as performance obligations were fulfilled;

which occurs upon the shipment of product to the customers for ship and bill orders or upon implantation for consignment sales.

All revenue is recognized at a point in time.

Revenue is recognized based on the consideration we expect to receive from the sale.

This consists of the gross selling price of the product, less any discounts or rebates (collectively, “ Deductions ” or “ sales deductions ”).

Gross selling price is a standard we set for all customers, unless a contract governing the sale provides for a specified price.

Sales deductions are specified in individual contracts with customers and generally achieved based on total sales during a specified period.

We estimate the total sales deductions which a specific customer will achieve over the relevant term and apply the deductions to sales as they are made throughout the period.

Rebates owed to customers are accrued and recorded in accrued expenses on the consolidated balance sheets.

We act as the principal in all of our customer arrangements and therefore record revenue on a gross basis.

Shipping is considered immaterial in the context of the overall customer arrangement, and damages or loss of goods in transit are rare.

Therefore, shipping is not deemed a separately recognized performance obligation and we have elected to treat shipping costs as activities to fulfill the promise to transfer the product.

We maintain a returns policy that allows our customers to return product that is consigned, damaged or non-conforming, ordered in error, or due to a recall.

The estimate of the provision for returns is based upon historical experience with actual returns given consideration to any changes in historical periods presented.

Our payment terms for customers are typically 30 to 60 days from receipt of title of the goods.

In addition to the above revenue recognition policy, we recognize revenue associated with the Remaining Contracts (as defined below) upon cash receipt.

The Remaining Contracts represent contracts for which all of the criteria necessary for revenue recognition were not met at the time of shipment and that such criteria would not be met until ultimate collection of such sales.

A summary of amounts collected and recorded as net sales for the years ended December 31, 2020 and 2019, as well as amounts still outstanding as of those dates, are as follows (amounts in thousands):

Amounts Invoiced and Not Collected Deferred Cost of Sales

Amounts as of September 30, 2019 $ 48,883 $ 6,415

Revenue recognized related to amounts invoiced and not collected at September 30, 2019:

Transition Adjustment during the three months ended September 30, 2019 (21,385) (2,565)

Cash collected during the three months ended December 31, 2019 related to the Remaining Contracts (8,219) (1,151)

(29,604) (3,716)

Write-off of customer contracts where collection is no longer reasonably assured (a) (10,273) (1,438)

Amounts as of December 31, 2019 9,006 1,261

Cash collected during the year ended December 31, 2020 (7,767) (1,087)

Amounts as of December 31, 2020 $ 1,239 $ 174

(a) The Company determined that for approximately $10.3 million of existing contracts where payment had not been received, collection was no longer reasonably assured.

As a result, $1.4 million of deferred cost of sales relating to these customers was written off.

Any future collections relating to these customer contracts will be recorded as revenue at the time payment is received.

Previous Revenue Recognition Policy and Transition

In 2018, and into part of 2019, our control environment was such that it created uncertainty surrounding all of our customer arrangements, which required consideration related to the proper revenue recognition under the applicable literature.

The control environment allowed for the existence of extra-contractual or undocumented terms or arrangements initiated by or agreed to by us and former members of Company management at the outset of the transactions (side agreements).

The control environment allowed for the existence of extra-contractual or undocumented terms or arrangements initiated by or

agreed to by us and former members of our management at the outset of the transactions (side agreements).

Concessions were also agreed to subsequent to the initial sale (e.g.

sales above established customer credit limits extended and unusually long payment terms, return or exchange rights, and contingent payment obligations) that called into question the ability to recognize revenue at the time that product was shipped to a customer.

The applicable revenue recognition guidance also changed beginning January 1, 2018 which further impacted our revenue recognition methodology.

As a result, our application of the applicable revenue recognition guidance varies for of the years ended December 31, 2019, 2018 and 2017.

Additionally, we changed our pattern of revenue recognition effective October 1, 2019.

The application of the relevant revenue recognition guidance and the revenue recognition policy are further discussed below for each period presented.

Fiscal Year Ended December 31, 2017

For the year ended December 31, 2017, we applied the revenue recognition guidance in ASC Topic 605, Revenue Recognition (“ ASC 605 ”).

Under ASC 605, revenue should not be recognized until it is realized or realizable and earned.

SEC Staff Accounting Bulletin (“ SAB ”) Topic 13.A.1 (as codified in ASC 605-10-S99-1) outlines four criteria that generally indicate when revenue is realized or realizable and earned.

If any of these criteria are not met, revenue recognition should be deferred until all criteria have been met.

Based on our evaluation, we determined that the revenue recognition criteria stipulated under ASC 605 were met only when both of the following events had occurred:

(1) we fulfilled the customer's purchase order by delivering product ordered, and (2) we collected payment for the product delivered.

Furthermore, we determined that the amount of revenue to be recognized should be limited to the amount of payment received in a given period less the amount expected to be refunded or credited to customers for sales returns made after payment.

An exception to the above revenue recognition under ASC 605 during the year ended December 31, 2017 related to the sales generated by our wholly-owned subsidiary, Stability.

For sales of our products through Stability, we recognized revenue under ASC 605 only when both of the following events had occurred:

(1) we fulfilled the customer’s purchase order by delivering all product ordered;

and (2) the product has been delivered to the customer.

Total sales from Stability were $7.0 million for the year ended December 31, 2017.

We divested Stability on September 30, 2017.

We changed our pattern of revenue recognition effective October 1, 2019.

As a result, our pattern of revenue recognition varies between the years ended December 31, 2020, 2019, and 2018.

The application of the relevant revenue recognition guidance and the pattern of revenue recognition are further discussed below for each period presented.

Fiscal Year Ended December 31, 2018

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• It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

We concluded that the first three of the above criteria were not met upon shipment of product to the customer, the fourth criteria had been met and we acknowledge that there is a degree of uncertainty as to whether last criteria above had been met.

Although the parties to the contract may have approved the contract and purchase orders in writing, we concluded that upon shipment of products to the customer there is not sufficient evidence that our customers were committed to perform their obligations defined in the contract due to the existence of extra-contractual or undocumented terms or arrangements (e.g., regarding payment terms, right of return, etc.).

We concluded that the first three of the above criteria were not met upon shipment of product to the customer, the fourth criteria had been met and we acknowledge that there was a degree of uncertainty as to whether last criteria above had been met.

Although the parties to the contract may have approved the contract and purchase orders in writing, we concluded that, upon shipment of products to the customer, there was not sufficient evidence that our customers were committed to perform their obligations defined in the contract due to the existence of extra-contractual or undocumented terms or arrangements (e.g., regarding payment terms, right of return, etc.).

We could not reliably identify each party’s rights regarding the products to be transferred upon shipment of those products to customers.

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The refund liability is included within accrued expenses in our consolidated balance sheet.

Fiscal Year Ended December 31, 2019

Fiscal Year Ended December 31, 2019 and Transition

We continued to assess new and existing contracts throughout 2019 to determine if the Step 1 Criteria noted above for the determination of a contract under ASC 606 were met for new contracts at the outset of a sales transaction (i.e., upon shipment of product) or for existing contracts at some point within 2019 when all the terms of the arrangement would have been known.

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These prior business practices and the lack of transparency surrounding them created a systemically implied right for customers to demand future and unknown performance by us.

Although some of the former executives were employed by us only through June 2018, we determined that based on the impact of the prior tone at the top, the continued internal sales force strategy and the existing customer base’s continued expectations (based on past practice), there would be flexibility with respect to arrangement terms even after delivery of the product so pervasive that all customer arrangements continued to be subject to uncertain modification of terms into 2019.

Although some of the former executives were employed by us

only through June 2018, we determined that based on the impact of the prior tone at the top, the continued internal sales force strategy and the existing customer base’s continued expectations (based on past practice), there would be flexibility with respect to arrangement terms even after delivery of the product so pervasive that all customer arrangements continued to be subject to uncertain modification of terms into 2019.

After identifying the primary factors contributing to the lack of knowledge regarding our customer contractual terms, we began implementing changes in mid-2018 to remediate the pervasive weaknesses in the control environment, followed by gradually implementing measures to empower our compliance, legal, and accounting departments;

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To address the tone at the top issues, we noted that proper remediation involved not only the removal of members of management who were setting an inappropriate tone but also the establishment of new management throughout the organization that emphasized a commitment to integrity, ethical values, and transparency and have that reinforcement for a sustained period of time.

The changes made to management positions throughout the organization and the resulting organization behavior changes were assessed to have been sufficiently addressed by the end of the second quarter of 2019.

The changes made to management positions throughout the organization and the resulting organizational behavior changes were assessed to have been sufficiently addressed by the end of the second quarter of 2019.

To determine when we had either eliminated or had sufficient knowledge to identify any extra-contractual arrangements, we noted that a key factor contributing to our historical lack of visibility into the arrangements with our customers was the failure to adhere to credit limits, payment terms and return policies.

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At that point, we determined that an accounting contract would exist and our performance obligations to deliver product to the customer to pay for the product would be satisfied.

As of December 31, 2019, upon reassessment, we concluded that the Step 1 Criteria continued to not be met due to the same circumstances described above for these contracts.

Upon continuing reassessment, we concluded that the Step 1 Criteria continued to not be met due to the same circumstances described above for these contracts.

We continued to record the deferred cost of sales on the arrangements that failed the Step 1 Criteria where collectibility was reasonably assured and will recognize the costs when the related revenue is recognized.

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We have consignment agreements with several customers and distributors which allow us to better market our products by moving them closer to the end user.

We determined that we have fulfilled our performance obligation once control of the product has been delivered to the customer, which occurs simultaneously with the product being implante d.

We act as the principal in all of our customer arrangements and therefore record revenue on a gross basis.

Shipping is considered immaterial in the context of the overall customer arrangement, and damages or loss of goods in transit are rare.

Therefore, shipping is not deemed a separately recognized performance obligation and we have elected to treat shipping costs as activities to fulfill the promise to transfer the product.

We maintain a returns policy that allows our customers to return product that is consigned, damaged or non-conforming, ordered in error, or due to a recall.

The estimate of the provision for returns is based upon historical experience with actual returns.

Our payment terms for customers are typically 30 to 60 days from receipt of title of the goods.

Based on the assessment noted above, we concluded that through the first two quarters of 2019, the pattern of revenue recognition under ASC 606 remained the same as the application for the year ended December 31, 2018;

that is, revenue was deferred until the product was paid for or returned.

In order to account for the determination that the Step 1 Criteria had been met during the third quarter of 2019, for existing customer arrangements, we recorded the following (in millions):

Amounts Invoiced and Not Collected

Deferred Cost of Sales

Amounts as of September 30, 2019

Revenue recognized related to amounts invoiced and not collected at September 30, 2019:

Transition Adjustment during the three months ended September 30, 2019

Cash collected during the three months ended December 31, 2019 related to the Remaining Contracts

Write-off of customer contracts where collection is no longer reasonably assured (a)

Amounts as of December 31, 2019

(a) The Company determined that for approximately $10.3 million of existing contracts where payment had not been received, collection was no longer reasonably assured.

As a result, $1.4 million of deferred cost of sales relating to these customers was written off.

Any future collections relating to these customer contracts will be recorded as revenue at the time payment is received.

Goodwill and Impairment of Long-Lived Assets

We determined that we have fulfilled our performance obligation once control of the product has been delivered to the customer, which occurs simultaneously with the product being implanted.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of purchase price over the fair value of net assets of acquired businesses.

Goodwill is tested for impairment annually on September 30, or whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired.

When testing for goodwill impairment, we first assess qualitative factors to determine whether events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If we conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we perform a quantitative fair value test to determine any potential impairment loss.

We assess the recoverability of our goodwill at least annually on September 30, or more frequently whenever events or substantive changes in circumstances indicate that it is more likely than not that goodwill is impaired.

In performing the goodwill impairment test, we evaluate qualitative factors to determine the existence of impairment.

If the qualitative factors indicate that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, we proceed to a quantitative test to measure the existence and amount of goodwill impairment.

We may also choose to bypass the qualitative assessment and proceed directly to the quantitative analysis.

As of the date of the filing of this Form 10-K, we have only one reporting unit.

Acquired indefinite lived intangible assets are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable.

Refer to Note 8 to the Consolidated Financial Statements for additional information.

At present, we have one reporting unit.

In performing the quantitative test, impairment loss is recorded to the extent that the carrying value of the reporting unit exceeds the assessed fair value of the reporting unit, not to exceed goodwill allocated to that reporting unit.

No impairment is recognized if fair value is determined to exceed carrying value.

We determine the fair value utilizing the income and market approaches.

Under the income approach, we assess fair value using the present value of future cash flows.

These future cash flows are derived from revenue, cost savings, tax deductions, and proceeds from a hypothetical disposition.

Value indications are developed by discounting expected cash flows to their present value at a risk-adjusted weighted average cost of capital using the capitalization of market comparable companies.

The weighted average cost of capital is rooted in the risk-free rate of a US Treasury with a similar maturity to the time period evaluated, credit risk adjustments, relevant equity risk premia, our incremental borrowing rate, and the prevailing marginal income tax rate.

Under the market approach, we use our market capitalization, which is calculated by taking our share price times the number of outstanding common shares plus the value of Series B Convertible Preferred Stock outstanding.

Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our consolidated balance sheets and the judgment required in determining fair value, including projected future cash flows.

Acquired indefinite-lived intangible assets are tested for impairment annually on September 30 or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may exceed fair value.

Our impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth estimates.

We use estimates consistent with business plans and a market participant view of the assets being evaluated.

Our estimates consistent with business plans and a market participant view of the assets being evaluated.

Actual results may differ from the estimates used in these analyses.

For the goodwill impairment test performed on September 30, 2020, we performed a quantitative test for its reporting unit, concluding that the fair value exceeded the carrying value.

Therefore, no goodwill impairment was recognized related to this test.

There were no recorded impairment losses related to goodwill in 2020, 2019, or 2018.

We recorded impairment losses of $1.3 million , $0.0 million , and $0.6 million , related to the abandonment of patents in process and write-off of certain customer relationships during 2019 , 2018 , and 2017, respectively.

The Company recorded impairment losses related to our indefinite-lived intangible assets of $0, $0.8 million, and $0 related to the abandonment of patents in process during 2020, 2019, and 2018, respectively.

Share-based Compensation

Our share-based compensation cost for equity awards granted to employees, members of the Board, and non-employee consultants is measured at the grant date based on the fair value of the award, is adjusted by the estimated forfeitures and is recognized as an expense over the requisite service or vesting period in accordance with Financial Accounting Standards Board (“ FASB ”) ASC Topic 718 “ Compensation–Stock Compensation, ” and under the recently issued guidance following FASB’s pronouncement, ASU 2018-07, “ Compensation-Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting ”, which we adopted on January 1, 2019, the effective date of the new guidance.

Determining the appropriate fair value model and calculating the fair value of employee and non-employee stock option and restricted common stock awards requires estimates and judgments.

Our share‐based compensation is a “critical accounting estimate” because changes in the assumptions used to develop estimates of fair value, the requisite service period, probability of achieving performance vesting conditions, or estimated forfeitures could materially affect key financial measures, including results of operations.

The fair value of restricted common stock is a value of common stock on a grant date.

We grant share-based awards to employees and members of our Board of Directors (the “ Board ”) and non-employee consultants.

Awards to employees and the Board are generally made annually as well as at certain points of time throughout the year at the discretion of the Board.

Awards to non-employee consultants are rare, occurring most recently in February 2018.

Such awards are recognized as share-based payment expense over the requisite service or vesting period, to the extent such awards are expected to vest in accordance with FASB ASC Topic 718 “ Compensation—Stock Compensation.

” The amount of expense to be recognized is determined by the fair value of the award using inputs available as of the grant date.

The fair value of restricted common stock is the value of common stock on the grant date.

The fair value of stock option grants is estimated using the Black-Scholes option pricing model.

Use of the valuation model requires management to make certain

assumptions with respect to selected model inputs.

Use of the valuation model requires us to make certain assumptions with respect to selected model inputs.

We use the simplified method for share-based compensation to estimate the expected term.

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Treasury yield curve in effect at the time of grant for the estimated option expected term.

We estimate volatility using a blend of our own historical stock price volatility as well as that of market comparable publicly traded peer companies, since historically, we did not have enough history to establish volatility based upon our own stock trading.

We estimate volatility using a blend of our own historical stock price volatility as well as that of market-comparable publicly-traded peer companies.

We routinely review our calculation of volatility for potential changes in future volatility, our life cycle, our peer group, and other factors.

In addition, an expected dividend yield of zero is used in the option valuation model because we do not pay cash dividends and do not expect to pay any cash dividends in the foreseeable future.

For awards with service conditions only, we recognize stock-based compensation expense on a straight-line basis over the requisite service or vesting period.

For awards with service and performance-based vesting conditions, we recognize stock-based compensation expense using the graded vesting expense attribution method over the requisite service period beginning in the period in which the awards are deemed probable to vest.

Vesting probability for an award with performance vesting conditions is assessed based upon our expectations to become compliant with applicable securities law regulatory requirements and reporting obligations, as well as other performance vesting conditions specified in the restricted share unit award agreements.

Finally, we use an expected dividend yield of zero;

we do not pay cash dividends on our common stock and do not expect to pay any cash dividends on our common stock in the foreseeable future.

For awards with service-based vesting conditions only, we recognize share-based compensation expense on a straight-line basis over the requisite service or vesting period.

For awards with service- and performance-based vesting conditions, we recognize stock-based compensation expense using the graded vesting method over the requisite service period beginning in the period in which the awards are deemed probable to vest, to the extent such awards are probable to vest.

We recognize the cumulative effect of changes in the probability outcomes in the period in which the changes occur.

We recognize the fixed dollar amount known on a grant date with respect to the restricted stock unit awards that will be settled by issuing shares on the vesting date, with the number of shares to be determined based on our stock price on the settlement date over the vesting period, with an offsetting liability.

Once the number of shares has been fixed and the shares are issued, we reclassify the liability related to the restricted share unit awards to equity.

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.

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Accrued interest and penalties, if any, are included within the related tax liability line in the consolidated balance sheet.

As of December 31, 2019 , 2018 , and 2017 , we had a valuation allowance recorded of $30.6 million , $27.3 million , and $0.6 million , respectively, against our net deferred tax assets.

The decrease in the valuation allowance during 2017 is primarily related to the weight of available evidence which resulted in a determination to release our valuation allowance and recognize an income tax benefit as of September 30, 2017.

The increase in valuation allowance during 2018 is primarily related to the weight of available evidence which resulted in the determination to increase our valuation allowance and recognize income tax expense as of December 31, 2018.

As of December 31, 2020 and 2019, we had a valuation allowance recorded of $35.6 million and $30.6 million, respectively, against our net deferred tax assets.

These amounts represent full valuation allowances against our net deferred tax assets.

To the extent we determine that, based on the weight of available evidence, all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance.

If management determines that, based on the weight of available evidence, it is more-likely-than-not that all or a portion of the net deferred tax assets will not be realized, we may recognize income tax expense in the period such determination is made to increase the valuation allowance.

On December 22, 2017, the United States enacted into law the Tax Cuts and Jobs Act (“ Tax Act ”).

The Tax Act made broad and complex changes to the U.S.

tax code, including a permanent corporate rate reduction to 21%.

The Tax Act includes provisions that affected 2017, including:

(1) requiring a remeasurement of all U.S.

deferred tax assets and liabilities to the newly enacted corporate tax rate of 21%;

(2) providing for additional first-year depreciation that allows full expensing of qualified property placed into service after September 27, 2017;

(3) repealing the domestic production activities deduction and (4) modifying the deductibility of certain meals & entertainment expenses incurred.

In late December 2017, the SEC staff issued Staff Accounting Bulletin 118 (“ SAB 118 ”), which provided guidance on accounting for the tax effects of the Tax Act.

SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under GAAP.

The most significant impact of the Tax Act was a one-time reduction in net deferred income tax assets of approximately $12 million, due primarily to the re-measurement of deferred tax assets at the lower 21% U.S.

federal corporate income tax rate.

Our accounting for the tax implications of the Tax Cuts and Jobs Act was complete as of December 31, 2018.

If management determines that, based on the weight of available evidence, it is more-likely-than-not that all or a portion of the net deferred tax assets will not be realized, we will maintain our valuation allowance and not record additional tax benefits in future years.

Contingencies

We are subject to various patent challenges, product liability claims, government investigations and other legal proceedings in the ordinary course of business.

Material legal proceedings are discussed in Note 16, “Commitments and Contingencies” in the Consolidated Financial Statements.

Contingent accruals and legal settlements are recorded in the consolidated statements of operations as litigation-related and other contingencies when we determine that a loss is both probable and reasonably estimable.

Material legal proceedings are discussed in Item 8, Note 14, “Commitments and Contingencies.” Contingent accruals and legal settlements are recorded in the consolidated statements of operations as litigation-related and other contingencies when we determine that a loss is both probable and reasonably estimable.

Legal fees and other expenses related to litigation are expensed as incurred and included in selling, general and administrative expenses in the consolidated statements of operations.

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Without access to and review of such information, we may not be in a position to determine whether a loss is probable.

Further, the timing and extent to which we obtain any such information, and our evaluation thereof, is often impacted by items outside of our control including, without limitation, the normal cadence of the litigation process and the provision of claim information to us by opposing counsel.

Further, the timing and extent to which we obtain any such information, and our evaluation thereof, is often impacted by factors outside of our control including, without limitation, the normal cadence of the litigation process and the provision of claim information to us by opposing counsel.

The amount of our liabilities for legal proceedings may change as we receive additional information and/or become aware of additional asserted or unasserted claims.

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As of December 31, 2020, our reserve for loss contingencies totaled $10.0 million related to the legal proceedings discussed in Note 14, “ Commitments and Contingencies ”.

Although we believe there is a reasonable possibility that a loss in excess of the

amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.

Although we believe there is a reasonable possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time.

Recently Adopted Accounting Pronouncements

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Our gross profit is affected by product and geographic sales mix, realized pricing of our products, the efficiency of our manufacturing operations and the costs of materials used to make our products.

Regulatory actions, including with respect to reimbursement for our products, may require costly expenditures or result in pricing pressure, and may decrease our gross profit and gross profit margin.

Regulatory actions, including with respect to reimbursement for our products, may require costly expenditures or result in pricing pressure, and may decrease our gross profit and gross margin.

Selling, general and administrative expenses

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We expect that these costs will increase in the near term as we continue to transition our manufacturing facilities into compliance with CGMP, advance our IND applications, and pursue BLAs for certain of our micronized products.

Important Cautionary Statement

We caution the reader that actual results may differ materially from our expectations, including those described under the subheadings “ Expected Impact of COVID-19 Pandemic” above and “Results of Operations - Recent Developments and Outlook ” below.

Among the factors that could cause actual results to differ are:

variances from our expectations or assumptions;

changes in reimbursement policy from public and private insurers and health systems;

the loss of a GPO or IDN;

changes in purchasing behavior by government accounts;

the loss of independent sales agents or distributors;

the removal of any of our products from

the market as a result of regulatory actions;

the success of our marketing efforts;

the fact that obtaining and maintaining the necessary regulatory approvals for certain of our products will be expensive and time consuming and may impede our ability to fully exploit our technologies;

rapid technological change could cause our products to become obsolete and, if we do not enhance our product offerings through our research and development efforts, we may be unable to compete effectively;

our ability to transition our manufacturing facilities into compliance with cGMP, advance our IND applications, complete our clinical trials and pursue BLAs for certain of our micronized products;

the fact that our business is subject to continuing regulatory compliance by the FDA and other authorities, which is costly, and our failure to comply could result in adverse effects on our business, results of operations and financial condition;

the fact that litigation and other matters relating to and arising out of the Investigation, including the accounting review of our previously issued consolidated financial statements and the audits of fiscal years 2018, 2017 and 2016, have been time consuming and expensive, and may result in additional expense;

and the fact that our variable rate indebtedness under the Hayfin Term Loan subjects us to interest rate risk, which could result in higher expense in the event of increases in interest rates and adversely affect our business, financial condition, and results of operations.

See Item 1A, “Risk Factors,” for more information.

Recent Developments and Outlook

Revenue for the quarter ended March 31, 2020 of $61.7 million , a $4.8 million or 7.2% decrease over the quarter ended March 31, 2019 revenue of $66.6 million .

The decrease primarily resulted from reduced sales of approximately $7.0 million in the Epi Wound product line and, to a lesser extent, due to the COVID-19 Pandemic in March 2020.

G ross profit margin in the first quarter of 2020 was 84% as compared to 89% in the first quarter of 2019 .

Gross profit decreased due to an increase in standard cost per unit caused by higher overhead/burden cost within production and quality assurance related to more stringent standards/regulations for cGMP compliance and BLA.

This was partially offset by lower volume due to reduction in sales.

Investigation, restatement and related expenses were $15.6 million in the quarter ended March 31, 2020.

As of March 31, 2020, the Company had $53.5 million of cash and cash equivalents and $72.2 million of long-term debt.

We expect net sales during the quarter ended June 30, 2020 to decline between 23-27% from $67.4 million of net sales in the quarter ended June 30, 2019.

We attribute most of this decline to the impact of COVID-19 as well as the discontinuation of OrthoFlo and AmnioFix Sports Medicine products.

The pandemic caused elective procedures to be delayed and/or canceled, as well as increased access restrictions within patient settings making it difficult to retain and generate new business.

Gross margin for the quarter ended June 30, 2020, is expected to be between 84-86%.

As noted above, the cost-containment actions continued in the second quarter and we expect SG&A expenses in the quarter ended June 30, 2020, to have decreased 16-20%, compared to the quarter ended June 30, 2019.

We expect Investigation, restatement and related expenses to be approximately $11.0 million in the quarter ended June 30, 2020.

Our expectations for 2020 results are based on our results to date.

However, given the uncertainty regarding the impact on the economy from the COVID-19 virus, it is particularly difficult to reliably forecast 2020 financial metrics.

Risk Factors - “ The COVID-19 pandemic and governmental and societal responses thereto have adversely affected our business, results of operations and financial condition, and the continuation of COVID-19 or the outbreak of other health epidemics could harm our business, results of operations, and financial condition.

Results of Operations for 2020 Compared to 2019

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(in thousands)

2020 2019 $ Change % Change

Net sales $ 248,234 $ 299,255 $ (51,021) (17.0) %

Gross profit 208,904 256,174 (47,270) (18.5) %

Selling, general and administrative 181,022 198,205 (17,183) (8.7) %

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Impairment of intangible assets 1,027 446 581 130.3 %

Loss on extinguishment of debt (8,201) — (8,201) 100.0 %

Interest expense, net (7,941) (4,708) (3,233) 68.7 %

Other (expense) income, net (3) 283 (286) (101.1) %

Income tax provision benefit (expense) 12,259 5 12,254 245,080.0 %

Net loss $ (49,284) $ (25,580) $ (23,704) 92.7 %

We recorded revenue for the year ended December 31, 2020 of $248.2 million, a decrease of $51.0 million or 17.0% over 2019 revenue of $299.3 million.

The decrease primarily resulted from a change in revenue recognition for sales, discussed below, and access restrictions, decreases in elective procedures, and cost savings measures implemented by hospitals, primarily brought upon by the COVID-19 pandemic.

As discussed in the “ Critical Accounting Policies ” section above, we assessed our sales arrangements with customers during 2019 beginning with the definition of a contract under ASC 606 at the time of shipment of goods to the customer or upon the delivery of such goods if so stipulated by the terms of sale.

Based on this assessment, we recognized revenue in 2019 related to the Transition and collections from the Remaining Contracts, totaling approximately $29.6 million.

Collections on the Remaining Contracts during the year ended December 31, 2020 totaled $7.8 million.

Excluding these impacts, Adjusted Net Sales were $240.5 million, compared to $269.7 million, a decrease of 11% principally driven by the impacts of the Pandemic noted earlier.

Adjusted Net Sales is a Non-GAAP financial metric intended to remove the effects of the Transition.

Refer to the section “ Non-GAAP Financial Metrics ” below for more information.

We expect adjusted net sales in 2021 to increase at least 10% over our reported adjusted net sales the prior year, assuming we are able to sell our micronized, particulate, and umbilical cord products for the full year.

However, the FDA may determine that our micronized, particulate, and/or umbilical cord-derived products do not qualify for regulation as human cells, tissues and cellular, and tissue-based products solely under Section 361 of the Public Health Service Act, and could require us to remove them from the market immediately.

As an example, if our micronized and particulate products are required to be removed from the market following the end of the period of enforcement discretion, currently anticipated for May 31, 2021, we estimate the impact on our expected 2021 net sales could be in the range of $20 million to $25 million.

Such a decision by the FDA could have a negative impact on our expected net sales.

See Item 1A - Risk Factors - “ To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of some new tissue products more expensive and could significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.” Our sales of micronized and particulate products for all uses was $32.8 million, 42.4 million, and $68.4 million, respectively, in 2020, 2019, and 2018.

Our sales of umbilical cord-derived products were $16.6 million, $17.9 million, and $14.7 million, respectively, in 2020, 2019, and 2018.

Further, because we cannot predict the impact of COVID-19 in 2021, our estimate for 2021 net sales assumes no restrictions on our ability to access hospitals, healthcare provider facilities and other places where we sell our products.

Gross margin in 2020 was 84.2%, compared to 85.6% in 2019.

The decrease in gross margin was driven by costs incurred to meet higher quality standards of CGMP, which we started incurring in the second half of 2019.

Selling, General and Administrative Expenses

Selling, General and Administrative (“ SG&A ”) expense for 2020 decreased approximately $17.2 million, or 8.7%, to $181.0 million, compared to $198.2 million for 2019.

The decrease in SG&A expense was driven by an $11 million decrease in compensation, which includes salaries, benefits, commissions, and bonus, as well as a $4 million decrease in travel and entertainment in 2020 compared to 2019.

These effects were, at least in part, driven by our response to the COVID-19 pandemic, in which we temporarily reduced salaries and other expenses.

In addition, we incurred lower commission expenses in 2020 than in 2019, primarily the result of a reduction in sales.

The remaining variance is primarily the result of a reduction in legal, consulting, and accounting expenses.

In 2021, we expect compensation expense to increase as a result of additional sales and medical education employees.

Investigation, Restatement and Related Expenses

Investigation, restatement, and related expenses decreased by $7.0 million, or 10.6% to $59.5 million for 2020 compared to $66.5 million for 2019.

The decrease resulted from fewer fees related to the Investigation and restatement in 2020 compared to 2019, offset by increases in legal fees incurred in connection with indemnification arrangements.

We expect to continue to incur litigation costs moving forward, but expect a significant reduction in Investigation, restatement, and related expenses year over year, other than costs to resolve the securities class action, the amount and timing of which are highly uncertain.

See Note 14, “ Commitments and Contingencies.”

Research and Development Expenses

Our research and development expenses increased approximately $0.6 million, or 5.2%, to $11.7 million in 2020, compared to $11.1 million in the prior year.

The increase is primarily due to year-over-year increases in consulting fees related to our clinical trial efforts.

We anticipate as much as a three-fold increase in research and development expense for 2021, as we plan to file additional INDs and continue working towards the filing of our BLAs, although this amount is partially dependent on whether the interim results from our ongoing IND clinical trials merit further investment.

Amortization of Intangible Assets

Amortization expense related to intangible assets remained relatively consistent for 2020 as compared 2019.

We expect amortization expense to decrease in 2021 and beyond because of the impairment of intangible assets recorded in 2020.

Impairment of Intangible Assets

Impairment of intangible assets of $1.0 million was recorded in 2020 related to the impairment of customer relationships acquired as part of the acquisition of Surgical Biologics, LLC in 2011.

Impairment of intangible assets of $0.4 million was recorded in 2019 related to the impairment of customer relationships that were part of the divestiture of Stability in 2017.

Loss on Extinguishment of Debt

Loss on extinguishment of debt of $8.2 million was recorded in 2020.

The following items, all of which related to the repayment and termination of our loan agreement with Blue Torch Financial, LLC (the “ BT Term Loan ”), comprise this activity (amounts in thousands):

Unamortized deferred financing costs $ 4,528

Unamortized original issue discount 1,538

Unamortized amendment fee 671

Prepayment premium 1,439

Other fees 25

Loss on extinguishment of debt $ 8,201

Interest Expense, net

Interest expense, net increased by $3.2 million to $7.9 million during the year ended December 31, 2020 from $4.7 million during the year ended December 31, 2019.

We incurred interest on the BT Term Loan through July 2, 2020 and interest on the Hayfin Term Loan from that point forward.

For 2019, we did not have interest-bearing debt until we borrowed funds on the BT Term Loan in June 2019.

We expect interest expense to decrease in 2021 compared to 2020.

The extent of this decrease will be

contingent upon whether we elect to draw the additional $25 million allowed under the delayed draw term loan.

This decrease is primarily the result of a lower interest rate on the Hayfin Term Loan compared to the BT Term Loan, combined with a reduction in deferred financing costs and original issue discount to be amortized over the year.

Other (Expense) Income, Net

Other income, net of $0.3 million during 2019, reflects amounts received in connection with a legal settlement.

Other expense, net during 2020 was immaterial.

The effective tax rate for 2020 was 19.9% on pre-tax book loss of $61.5 million, primarily reflecting a current tax benefit associated with the carryback of federal net operating losses, as permitted by the CARES Act.

Such net operating losses were previously offset by a valuation allowance, which was released during 2020.

Results of Operations for 2019 Compared to 2018

Year Ended December 31,

(in thousands)

2019 2018 $ Change % Change

Net sales $ 299,255 $ 359,111 $ (59,856) (16.7) %

Gross profit 256,174 322,725 (66,551) (20.6) %

Selling, general and administrative 198,205 258,528 (60,323) (23.3) %

Investigation, restatement and related 66,504 51,322 15,182 29.6 %

Research and development 11,140 15,765 (4,625) (29.3) %

Amortization of intangible assets 1,039 1,034 5 0.5 %

Impairment of intangible assets 446 — 446 100.0 %

Interest (expense) income, net (4,708) 527 (5,235) (993.4) %

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Income tax provision benefit (expense)

5 (26,582) 26,587 (100.0) %

$ (25,580) $ (29,979) $ 4,399 (14.7) %

We recorded revenue for the year ended December 31, 2019 of $299.3 million, a decrease of $59.9 million or 16.7% over 2018 revenue of $359.1 million.

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Further, both the negative publicity resulting from the Audit Committee Investigation and discontinuing the OrthoFlo and AmnioFix Sports Medicine product lines adversely affected revenues.

Gross Profit Margin

Gross profit margin in 2019 was 85.6% , as compared to 89.9% in 2018 .

The gross profit margin decrease reflects fixed overhead costs being spread over lower production levels, increased costs of production related to the higher quality standards of cGMP, and higher scrap levels in the second half of the year.

We implemented an electronic batch record system late in 2019 , and are enhancing that system in 2020, and expect to reduce the incidence of scrap going forward.

Research and Development Expenses

Our research and development expenses decreased approximately $4.6 million , or 29.3% , to $11.1 million in 2019 , compared to $15.8 million in the prior year.

The decrease is primarily due to year-over-year decreases in clinical trial activities, the reductions in personnel due to the Company’s reduction in workforce as well as the decision to significantly reduce animal studies.

We anticipate increasing our research and development spend in 2020 as we file additional INDs and work towards the BLAs.

Gross margin in 2019 was 85.6%, as compared to 89.9% in 2018.

The gross margin decrease reflects fixed overhead costs being spread over lower production levels, increased costs of production related to the higher quality standards of CGMP.

We implemented an electronic batch record system late in 2019.

Selling, General and Administrative Expenses

Selling, General and Administrative (“ SG&A ”) expense for 2019 decreased approximately $60.3 million , or 23.3% , to $198.2 million (or 66.2% of revenues), compared to $258.5 million (or 72.0% of revenues) for 2018 .

Selling, General and Administrative expense for 2019 decreased approximately $60.3 million, or 23.3%, to $198.2 million, compared to $258.5 million for 2018.

Sales and Marketing expense included in SG&A decreased by $33.1 million, or 19.8%, to $134.2 million for 2019 compared to $167.3 million for 2018.

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General and administrative (“ G&A ”) expense included in SG&A decreased by $27.2 million, or 29.9%, to $64.0 million for 2019 compared to $91.2 million for 2018.

The decrease was largely due to the completion of the Investigation in May 2019 and was

partially offset by costs in 2019 related to the two proxy contests in connection with the 2018 annual meeting of shareholders.

The decrease was largely due to the completion of the Investigation in May 2019 and was partially offset by costs in 2019 related to the two proxy contests in connection with the 2018 annual meeting of shareholders.

The decrease in total G&A was also due to the reduction of our workforce announced in December 2018 by approximately 240 full-time employees, or 24% of our total workforce, of which about half were sales force personnel.

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The increase in 2019 as compared to 2018 primarily resulted from an increase in restatement, litigation, consulting fees and settlements of $21.7 million partially offset by a decrease in investigation fees of $6.5 million.

The Investigation was completed in 2019 and we do not expect to incur these costs going forward.

Restatement costs are third-party service costs related to compiling, completing and auditing the financial statements included in the 2018 Form 10-K and in this filing, and thus we expect to incur these costs in the first half of 2020.

• The Investigation was completed in 2019.

• Restatement costs are third-party service costs related to compiling, completing and auditing the financial statements included in the 2018 Form 10-K and in this filing.

• Litigation fees increased by $11.6 million year over year from $14.6 million for 2018 compared to $26.2 million for 2019 due to the increase in settlement disputes and near-term contingencies related to the internal investigation.

we expect to continue incurring these costs in the future as we address our contingent liabilities.

• Consulting costs in 2019 related to staff augmentation for restatement activities and advisory services related to financial reporting, internal controls, and the 2019 proxy contests.

We continued to incur such costs in 2020 to assist with our effort to become current with our SEC financial reporting requirements.

We may incur settlement costs in the future as we resolve contingent liabilities;

see Note 16, “ Commitments and Contingencies.

Through March 31, 2020, we have incurred $17.6 million of legal and other fees under indemnification agreements for current and former officers and directors.

We expect to incur additional indemnification costs in 2020 as these cases continue.

Research and Development Expenses

Our research and development expenses decreased approximately $4.6 million, or 29.3%, to $11.1 million in 2019, compared to $15.8 million in the prior year.

Amortization of Intangible Assets

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The effective tax rate in 2018 of (782.6)%, based on pre-tax book loss of $3.4 million, reflects the increase in the valuation allowance.

Results of Operations for 2018 Compared to 2017

Year Ended December 31,

(in thousands)

Selling, general and administrative

Investigation, restatement and related

Research and development

Amortization of intangible assets

Loss on divestiture

Interest income (expense), net

Income tax provision (expense) benefit

Net (loss) income

We recorded revenue for the year ended December 31, 2018 of $359.1 million , an increase of $38.0 million or 11.8% over 2017 revenue of $321.1 million .

The increase primarily resulted from favorable insurance coverage developments, which resulted in an increase in the number of units sold.

Additionally, we increased our direct sales force through the first three quarters of 2018 which resulted in the addition of new customers.

Further, revenues benefited from sales made in prior periods and collected during 2018.

These effects were partially offset by unfavorable insurance coverage developments, unfavorable publicity resulting from the Investigation, increased turnover of experienced sales personnel and related events in the fourth quarter of 2018.

Gross Profit Margin

Gross profit margin in 2018 was 89.9% , as compared to 89.0% in 2017 .

Gross profit margin increased due to the mix of products sold in 2018, including as a result of the divestiture of Stability on September 30, 2017 (whose products were relatively lower-margin).

During 2018, we also saw an improvement in yield as a result of improved manufacturing efficiency in our wound care line.

Research and Development Expenses

Our research and development expenses decreased approximately $2.1 million , or 11.9% , to $15.8 million in 2018 , compared to approximately $17.9 million in the prior year.

The decrease is primarily due to year-over-year decreases in clinical trial activities as well as the decision to significantly reduce animal studies in 2018.

In 2017, research and development expenses were driven by several multiple-site clinical trials related to our EpiCord and EpiFix products.

These projects were completed during 2018.

Selling, General and Administrative Expenses

Selling, General and Administrative (“ SG&A ”) expense for 2018 increased approximately $38.4 million , or 17.4% , to $258.5 million (or 72.0% of revenues), compared to $220.1 million (or 68.5% of revenues) for 2017 .

Sales and Marketing expense included in SG&A increased by $13.4 million, or 8.7% , to $167.3 million for 2019 compared to $153.9 million for 2017.

The increase was primarily due to an increase in compensation related to the additional headcount of 72 employees from December 2017 through August 2018, as well as an increase in sales commissions based on shipments during the year.

General and administrative expense included in SG&A increased by $25.0 million , or 37.7% , to $91.2 million for 2019 compared to $66.2 million for 2017 .

Legal fees increased by $4.8 million, or 35.7% , to $18.4 million compared to $13.6 million for 2017.

Consulting fees included in SG&A were $1.6 million for 2018 as compared with $0.3 million for 2017.

The increase was primarily due to an increase in compensation related to the additional headcount of 34 employees from December 2017 through August 2018, prior to the reduction in force in December 2018, as well as an increase in accounting fees due to the change in audit firms in mid-2018.

In December 2018, we announced a reduction of our workforce by approximately 240 full-time employees, or 24% of our total workforce, of which about half were sales force personnel as part of previously announced plans to implement a broad-based organizational realignment, cost reduction and efficiency program to better ensure our cost structure is appropriate given our revenue expectations.

As a result of the December 2018 broad-based organizational realignment, cost reduction and efficiency program, we incurred pre-tax charges of $ 6.1 million during the year ended December 31, 2018.

Investigation, restatement, and related expenses was $51.3 million in 2018 compared to $0 for 2017 .

The increase in legal, accounting, and other professional consulting fees incurred in 2018 as compared to 2017 primarily resulted from the Investigation, including legal fees, forensic audit fees, and consulting fees relating to the Restatement;

and legal fees relating to the SEC Investigation, shareholder derivative lawsuits, and other litigation, as well as settlements made with former employees.

Share-based compensation included in SG&A for the years ended December 31, 2018 and 2017, was approximately $13.5 million and $20.1 million , respectively, a decrease of approximately $6.6 million, or 32.8% .

The decrease was primarily due to our reduction in workforce in 2018, forfeitures of outstanding equity awards in connection with the reduction in workforce, and a reduction in the size of new equity-based awards to employees in 2018.

Amortization of Intangible Assets

Amortization expense related to intangible assets decreased approximately $0.7 million , or 38.4% , to $1.0 million for the year ended December 31, 2018, compared to $1.7 million in the prior year.

Amortization decreased primarily due to the divestiture of Stability during the third quarter of 2017.

We amortize our intangible assets over a period of 4 to 20 years, which we believe represents the remaining useful lives of the patents underlying the licensing rights and intellectual property.

We do not amortize goodwill, but we test our goodwill at least annually for impairment and periodically evaluate other intangibles for impairment based on events or changes in circumstances as they occur.

Interest Income (Expense), net

Interest income (expense), net increased to $0.5 million during the year ended December 31, 2018 from $(0.1) million during the year ended December 31, 2017.

This increase was due to a decision in late 2017 to begin charging interest on past due customer balances, partially offset by the amortization of deferred financing costs incurred during 2018 related to our $50 million revolving credit facility and commitments and undrawn fees connected to our line of credit.

See Note 10, “ Long-Term Debt ,” in the Consolidated Financial Statements for further details.

The effective tax rate for 2018 was (782.6)% on pre-tax book loss of $3.4 million .

This compares to an effective tax rate of (43.6)% based on pre-tax book income of $45.1 million in 2017.

Our 2018 effective tax rate was driven largely by increases in our valuation allowance, causing $26.8 million of incremental income tax expense, an effective tax rate impact of (788.3)% .

Other offsetting tax adjustments yielded an effective tax rate of 5.7% .

In 2017, the Company derived significant tax benefits associated with the disposition of the Company’s interest in Stability (total benefit of approximately $5.3 million;

effective tax rate impact of (8.9)% along with significant tax benefits associated with stock compensation-related deductions (total benefit of approximately $4.8 million;

effective tax rate benefit of (9.9)% .

As a result of the Restatement, we re-evaluated the valuation allowance determinations made in prior years.

Our analysis was updated to consider the changes to our historical operating results following the Investigation and subsequent review by management.

In that process, we evaluated the weight of all evidence, including the ability or inability to project future income to utilize our deferred tax assets, and we concluded that as of December 31, 2015, our U.S.

federal and state net deferred tax assets were no longer more-likely-than-not to be realized and that a valuation allowance was required.

The decrease in the valuation allowance during 2017 is primarily related to the weight of available evidence which resulted in a determination to release the Company’s valuation allowance and recognize an income tax benefit as of September 30, 2017.

The increase in valuation allowance during 2018 is primarily related to the weight of available evidence which resulted in the determination to increase the Company’s valuation allowance and recognize income tax expense as of December 31, 2018.

Contractual Obligations

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The table below summarizes the amounts and estimated timing of these future cash payments as of December 31, 2020 (in thousands):

Contractual Obligations

BT Term Loan principal

BT Term Loan interest

Contractual Obligations Total 1 year 1-3 years 3-5 years Thereafter

Hayfin Term Loan Principal $ 50,000 $ — $ — $ 50,000 $ —

Hayfin Term Loan Interest 18,815 4,182 8,365 6,268 —

Operating lease obligations 4,993 1,537 2,074 677 705

Meeting space commitments 1,058 169 889 — —

Other 253 120 133 — —

Total $ 75,119 $ 6,008 $ 11,461 $ 56,945 $ 705

In addition, holders of our Series B Preferred Stock are entitled to cumulative dividends at a rate of 4.0% per annum prior to the quarterly dividend payment ending on June 30, 2021, and a 6.0% cumulative dividend per annum thereafter.

Dividends are declared at the sole discretion of our board of directors.

Dividends, if declared, are paid in cash at the end of each quarter based on dividend amounts that accumulate beginning on the last payment date through the day prior to the end of each quarter.

In lieu of paying a dividend in cash, we may elect to accrue the dividend owed to shareholders.

Accrued dividend balances, themselves, accumulate dividends at the prevailing dividend rate for each dividend period for which they are outstanding.

If prior to the payment of accrued dividends, the holders of the Series B Preferred Stock exercise their conversion rights, or the automatic conversion feature of the Series B Preferred Stock is triggered, in each case with respect to any outstanding shares of Series B Preferred Stock, such holders are entitled to receive common shares equal to the accrued but unpaid dividend balance divided by $3.85.

In addition, the holders may require the Company to redeem the Series B Preferred Stock for the initial purchase price plus any accrued dividends in the event of a change in control.

We have not declared or paid any cash dividends on our Series B Convertible Preferred Stock since the issuance of such shares.

Dividends in arrears as of December 31, 2020 were approximately $2.0 million.

Assuming we do not declare or pay a cash dividend, the holders do not exercise their option to convert, and the other conversion or redemption features are not triggered, we would accrue approximately $5.2 million of dividends in 2021, $13.5 million in aggregate in 1-3 years, and $15.3 million in aggregate in 3-5 years.

Off-Balance Sheet Arrangements

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Liquidity and Capital Resources

Our business requires capital for its operating activities, including costs associated with the sale of product through direct and indirect sales channels, the conduct of research and development activities, compliance costs, and legal and consulting fees in connection with ongoing litigation and other matters.

We generally fund our operating capital requirements through our operating activities, cash reserves and, since June 2019, proceeds from term loans.

We expect to use capital in the near and medium term to implement our priorities, including for capital investments, steps to complete achievement of cGMP compliance, advancement of our IND applications, pursuit of BLAs for certain of our micronized products, and settlements of certain legal matters.

As of December 31, 2019, the Company had approximately $69.1 million of cash and cash equivalents.

We require capital for our operating activities, including costs associated with the sale of product through direct and indirect sales channels, the conduct of research and development activities, compliance costs, and legal and consulting fees in connection with ongoing litigation and other matters.

We generally fund our operating capital requirements through our operating activities, cash reserves and proceeds from certain financing activities.

We expect to use capital in the near and medium term to implement our current business priorities, including advancement of our IND applications, pursuit of BLAs for certain of our micronized products, settlements of certain legal matters, capital investments, and potential obligations under indemnification agreements with certain former members of management.

We have funded our cash requirements, including for our operating activities through existing cash reserves and from operating activities and the term loans described below under “ Term Loans.

” In addition, on July 2, 2020, we issued shares of Series B Preferred Stock to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP pursuant to the Securities Purchase Agreement for an aggregate purchase price of $100 million.

As of December 31, 2020, the Company had $95.8 million of cash and cash equivalents.

Our net working capital at December 31, 2020, increased $45.5 million to $101.5 million from $55.9 million at December 31, 2019.

The increase in working capital was primarily due to the change in our revenue recognition methodology and the establishment of accounts receivable along with an increase in cash collections.

The increase in working capital was primarily due to net proceeds resulting from the Financing Transactions on July 2, 2020.

Our current ratio (current assets divided by current liabilities) was 2.7 to 1 as of December 31, 2020 and 1.8 to 1 as of December 31, 2019.

We have funded our cash requirements, including for our operating activities and for the Investigation and Restatement, through existing cash reserves and from operating activities and the term loans described below under “ Term Loans.

” In addition, on July 2 , 2020, we issued $100 million of Series B Preferred Stock to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin Capital Management LLP pursuant to the Securities Purchase Agreement for an aggregate purchase price of $100 million.

The Company is currently paying its obligations in the normal course of business.

We believe that, due to the Preferred Stock Transaction and the Hayfin Loan Agreement (which provides for significantly less restrictive financial covenants than the BT Loan Agreement), our anticipated cash from operating activities, existing cash, and cash equivalents will enable us to meet our operational liquidity needs.

See Note 19, “ Restructuring, ” in the Consolidated Financial Statements.

We believe that our anticipated cash from operating activities and existing cash and cash equivalents will enable us to meet our operational liquidity needs for the twelve months following the filing date of this Form 10-K.

We expect to incur additional costs in connection with efforts to enhance our CGMP compliant manufacturing capabilities and toward the completion of the BLA process.

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These efforts also require human capital, expertise and resources.

Additionally, as discussed in Note 16, “ Commitments and Contingencies ,” and further addressed in Note 21, “ Subsequent Events ,” of the Consolidated Financial Statements, we anticipate cash requirements related to the following items within one year from the date of the filing of this Form 10-K:

lawsuits or potential settlements for which we are not able to estimate a loss;

private securities lawsuits, for which we are currently not able to estimate a loss and for which it is unclear whether we would be indemnified under various insurance policies;

investments and other expenditures required in order to bring the Company’s facilities into compliance with current Good Manufacturing Practices (“ cGMPs ”).

Following the Preferred Stock Transaction, the Hayfin Loan Transaction, and the repayment and termination of the BT Loan Agreement, we analyzed our ability to address the aforementioned commitments and potential liabilities while remaining compliant with the financial covenants set forth in the Hayfin Loan Agreement discussed below for the 12 months extending from the date of the filing of this 2019 Form 10-K.

Based on this analysis, and in combination with existing cash on hand, we believe it is probable that we will meet all obligations as they come due without violating the financial covenants set forth in the Hayfin Loan Agreement, as discussed below.

Therefore, we concluded that there is no substantial doubt surrounding our ability to continue as a going concern.

BT Term Loan.

On June 10, 2019, we entered into the BT Loan Agreement to borrow funds with a face value of $75.0 million (the “ BT Term Loan ”), the full amount of which was borrowed and funded.

The proceeds of the BT Term Loan were used (i) for working capital and general corporate purposes and (ii) to pay transaction fees, costs and expenses incurred in connection with the BT Term Loan and the related transactions.

The BT Term Loan was issued net of the original issue discount of $2.3 million .

The Company also incurred $6.7 million of deferred financing costs.

The interest rate applicable to any borrowings under the BT Term Loan was equal to LIBOR plus a margin of 8.00% per annum.

The BT Term Loan had an interest rate equal to 10.46% at the time the BT Loan Agreement was executed and an interest rate equal to 9.95% at March 31, 2020.

The BT Loan Agreement contained financial covenants requiring us to maintain the following:

Maximum total leverage ratio, defined as funded debt divided by consolidated adjusted EBITDA, of not more than 3.0 to 1.0 as of the last day of the four consecutive fiscal quarters.

Our total leverage ratio was 1.7 times at December 31, 2019, a cushion of 1.3 times.

Minimum liquidity of the Company, defined as unrestricted cash and cash equivalents, is not permitted, as of the last business day of each fiscal month following the BT Term Loan closing date through and including the fiscal month ending May 31, 2020, to be less than $40 million, and (b) beginning with the fiscal month ending June 30, 2020 and for each month ending thereafter, to be less than $30 million;

provided that, beginning with fiscal month ending December 31, 2020, the total leverage ratio is less than 2.50 to 1.00 as of the last business day of any fiscal month, the liquidity of the Company shall not be less than $20 million.

Our cash on hand was $69.1 million at December 31, 2019, exceeding the $40 million minimum liquidity by $29.1 million, and our cash on hand was $53.5 million as of March 31, 2020.

Effective April 22, 2020, the BT Loan Agreement was amended to provide for an increase in the maximum Total Leverage Ratio, which was a quarterly test, from a Total Leverage Ratio of 3.00 to 1.00 to a new Total Leverage Ratio of 5.00 to 1.00 for the quarterly periods ending on June 30, 2020, September 30, 2020, and December 31, 2020, and also provided for a reduction in the minimum Liquidity covenant, which was a monthly requirement, from $40 million to $20 million for April and May 2020 and form $30 million to $20 million for June through November 2020.

In connection with the amendment, we agreed to pay a one-time fee of approximately $0.7 million , added to the principal balance, and a 1 percentage point increase in the interest rate to LIBOR plus 9% .

The BT Loan Agreement provided that any prepayment of the loan subjected MiMedx to a prepayment penalty as of the date of the prepayment with respect to the BT Term Loan of:

During the period from June 10, 2019 through June 10, 2020, an amount equal to 3% of the principal amount of the BT Term Loan prepaid on such date;

During the period from June 11, 2020 through June 10, 2021, an amount equal to 2% of the principal amount of the BT Term Loan prepaid on such date.

Principal prepayments after June 10, 2021 were not subject to a prepayment penalty.

Hayfin Term Loan;

Preferred Stock Transaction;

Termination of BT Loan Agreement.

On July 2, 2020, the Company borrowed an aggregate of $50 million and obtained an additional committed but undrawn $25 million facility pursuant to the Hayfin Loan Agreement.

A portion of the proceeds of the Preferred Stock Transaction and the Hayfin Loan Transaction was used to repay the outstanding principal balance of $72.0 million, accrued interest and fees of $0.1 million, and prepayment penalty of $1.4 million under the BT Loan Agreement.

The Company also terminated the BT Loan Agreement on July 2, 2020.

For further information regarding the Preferred Stock Transaction, the Hayfin Loan Transaction (including the terms of the Hayfin Loan Agreement) and the termination of the BT Loan Agreement, see Item 9B, “ Other Information .”

Additionally, as discussed in Note 14, “ Commitments and Contingencies ,” of the Consolidated Financial Statements, we anticipate cash requirements related to the following items within one year from the date of the filing of this Form 10-K:

• lawsuits or potential settlements for which we are not able to estimate a loss, or for which our ultimate our estimate for loss.

In addition, it is uncertain if we would be entitled to indemnification from our insurance providers;

• indemnification agreements involving certain former members of our management team;

• investments and other expenditures required to advance our INDs and BLAs.

We have analyzed our ability to address aforementioned commitments and potential liabilities for the 12 months extending from the date of the filing of this 2020 Form 10-K.

We believe it is probable that we will meet all obligations as they come due.

On June 30, 2020, we entered into a Loan Agreement with, among others, Hayfin Services, LLP, (“ Hayfin ”) an affiliate of Hayfin Capital Management LLP (the “ Hayfin Loan Agreement ”), which was funded (the “ Hayfin Loan Transaction ”) on July 2, 2020 (the “ Closing Date ”) and provided us with a senior secured term loan in an aggregate amount of $50 million (the “ Term Loan ”) and an additional delayed draw term loan (the “ DD TL ”, collectively, the “ Credit Facilities ”) in the form of a committed but undrawn facility in an amount not to exceed $25 million.

The Term Loan and the DD TL both mature on June 30, 2025 (the “ Maturity Date ”).

Interest is payable on the Term Loan and the DD TL for balances outstanding quarterly through the Maturity Date.

No principal payments on either the Term Loan or the DD TL are due and payable until the Maturity Date.

The Term Loan and DD TL, which are senior secured obligations, were sold shares of our Series B Convertible Preferred Stock (as defined and described in Note 10, “ Equity ”) for an aggregate amount of $100 million in order to:

(1) refinance, in whole, the outstanding indebtedness (the “ Refinancing ”) under the Loan Agreement, dated as of June 10, 2019 (as amended and restated, the “ BT Term Loan Agreement ”), among us, the lenders and Blue Torch Finance LLC as administrative agent and collateral agent for such lenders,

(2) pay fees and expenses incurred with certain financing transactions, and

(3) finance the working capital, capital expenditures, and other general corporate obligations of the Company.

The interest rate applicable to any borrowings under the Term Loan is equal to LIBOR (subject to a floor of 1.5%) plus a margin of 6.75% per annum.

If LIBOR is unavailable, the loan will carry interest at the greatest of the Prime Rate, the Federal Funds Rate plus 0.5% per annum, and 2.5%, plus the margin of 6.75%.

After December 31, 2020, the margin on the interest rate is eligible for a reduction;

• 6.75% per annum if the Total Net Leverage Ratio (as defined in the Hayfin Loan Agreement) is greater than 2.0x,

• 6.5% per annum if the Total Net Leverage Ratio is less than 2.0x but greater than or equal to 1.0x, or

• 6.0% per annum if the Total Net Leverage Ratio is less than 1.0x.

At December 31, 2020, the Total Net Leverage Ratio was 3.1x.

At issuance, and as of December 31, 2020, the Term Loan carried an interest rate of 8.3%.

An additional 3.0% margin is applied to the interest rate in the event of default as defined by the Hayfin Term Loan Agreement.

The Credit Facilities contain financial covenants requiring the Company, on a consolidated basis, to maintain the following:

• Maximum Total Net Leverage Ratio of 5.0x through the quarter ended December 31, 2020, reduced to 4.5x through the quarter ending June 30, 2021, further reduced to 4.0x thereafter for the life of the loans, required to be calculated on a quarterly basis.

At December 31, 2020, the Total Net Leverage Ratio was 3.1x.

• Delayed Draw Term Loan Incurrence Covenant (as defined in the Hayfin Loan Agreement) of 3.5x Total Net Leverage, tested prior to any drawings under the DD TL.

At December 31, 2020, the Total Net Leverage Ratio was 3.1x.

• Minimum Liquidity (as defined in the Hayfin Term Loan Agreement) of $10 million, an at-all-times financial covenant, tested monthly.

As of December 31, 2020, the Company had approximately $95.8 million of cash and cash equivalents.

The Credit Facilities also specify that any prepayment of the loan, voluntary or mandatory, as defined in the Term Loan Agreement, subjects us to a prepayment premium applicable as of the date of the prepayment:

• On or before the first anniversary of the Closing Date:

◦ A make-whole premium, equal to the greater of:

▪ 5% of the principal balance repaid,

▪ 102% of the principal balance plus interest that would have been accrued from the repayment date to 12 months following the Closing Date.

• After the first anniversary of the Closing Date but on or before the second anniversary of the Closing Date:

2% of the principal balance repaid.

• After the second anniversary of the Closing Date but on or before the third anniversary of the Closing Date:

1% of the principal balance repaid.

• After the third anniversary of the Closing Date:

0% of the principal balance repaid.

The Loan Agreement also includes certain negative covenants events of default customary for facilities of this type, and upon the occurrence of such events of default, subject to customary cure rights, all outstanding loans under the Credit Facilities may be accelerated or the lenders’ commitments terminated.

The mandatory prepayments are also required in the event of a change in control, incurring other indebtedness, certain proceeds from disposal of assets and insured casualty event.

Beginning with the fiscal year ending December 31, 2021, we are required to prepay the outstanding loans based on the percentage of Excess Cash Flow (as defined in the Hayfin Loan Agreement), if such is generated, with the percentage determined based on the Total Net Leverage thresholds.

Series B Convertible Preferred Stock

On July 2, 2020, we issued shares of our Series B Convertible Preferred Stock, par value $0.001 per share (the “ Series B Preferred Stock ”) to an affiliate of EW Healthcare Partners and to certain funds managed by Hayfin (individually, the “ Holder ”, collectively the “ Holders ”) pursuant to a Securities Purchase Agreement with Falcon Fund 2 Holding Company, L.P., an affiliate of EW Healthcare Partners, and certain funds managed by Hayfin, dated as of June 30, 2020 (the “ Securities Purchase Agreement ”), for an aggregate purchase price of $100 million (the “ Preferred Stock Transaction ”).

The Series B Preferred Stock pays a 4.0% cumulative dividend per annum prior to the quarterly dividend payment ending on June 30, 2021, and a 6.0% cumulative dividend per annum thereafter.

Dividends are declared at the sole discretion of our board of directors.

Dividends, if declared, are paid in cash at the end of each quarter based on dividend amounts that accumulate beginning on the last payment date through the day prior to the end of each quarter.

In lieu of paying a dividend in cash, we may elect to accrue the dividend owed to shareholders.

Accrued dividend balances accumulate dividends at the prevailing dividend rate for each dividend period for which they are outstanding.

Each share of Series B Preferred Stock, including any accrued and unpaid dividends, is convertible into our common stock at any time at the option of the Holder at a conversion price of $3.85 per common share, or 259.74 common shares for each Series B Preferred Share prior to any accrued and unpaid dividends.

The Series B Preferred Stock, including any accrued and unpaid dividends, automatically converts into common stock at any time after the third anniversary of the issuance date, provided that the common stock has traded at 200% or more of the conversion price (i) for 20 out of 30 consecutive trading days and (ii) on such date of conversion.

If we undergo a change of control, we will have the option to repurchase some or all of the then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference, subject to the rights of the Holders of the Series B Preferred Stock in connection with such change in control.

If we do not exercise such repurchase right, Holders of the Series B Preferred Stock will have the option to (1) require us to repurchase any or all of our then-outstanding shares of Series B Preferred Stock for cash in an amount equal to the liquidation preference or (2) convert the Series B Preferred Stock, including accrued and unpaid dividends into common stock and receive its pro rata consideration thereunder.

We have not declared or paid any cash dividends on our Series B Convertible Preferred Stock since issuance.

Dividends in arrears as of December 31, 2020 was $2.0 million.

Liquidity Considerations

Prior to the Preferred Stock Transaction and the Hayfin Loan Transaction , at June 26, 2020, the Company had approximately $48 million of cash and cash equivalents and approximately $73 million of long-term debt .

Following the closing of the Preferred Stock Transaction and the Hayfin Loan Transaction, and the repayment of the BT Loan Agreement, as of July 2, 2020, the Company had approximately $110 million of cash and cash equivalents and approximately $50 million of long-term debt.

See Note 21 “ Subsequent Events ” for additional discussion.

Since receiving the proceeds from our term loan borrowing in June 2019, our cash and cash equivalents were $96.9 million on June 30, 2019, $94.1 million on September 30, 2019, $69.1 million on December 31, 2019, and $53.5 million on March 31, 2020.

The decline in cash and cash equivalents during this time is primarily the result of investigation, restatement and legal expenses we have incurred.

While investigation activities are primarily completed and restatement activities are nearing completion, costs to remediate our internal controls and resolve outstanding legal matters are expected to continue.

Our net sales declined 17% in 2020 compared to 2019.

In the first quarter of 2020, our net sales also declined 14% compared to the first quarter of 2019.

Because of the COVID-19 pandemic, we anticipate a steeper reduction to our reported second quarter of 2020 net sales of 23% - 27% compared to the second quarter of 2019.

In addition, all of our revenues from micronized products, which accounted for $45.0 million, $68.4 million, and $42.4 million respectively, in 2017, 2018, and 2019, are at risk upon the expiration of the FDA’s enforcement discretion, which is scheduled to expire on November 20, 2020.

See Item 1A - Risk Factors - “ To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of new tissue products more expensive and would significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.”

Further, our liquidity is challenged by expected costs, required investments to bring our manufacturing facilities up to cGMP compliance, required investments in clinical trials to support BLAs, and contingent liabilities:

We expect to continue to incur costs to indemnify former officers and directors in legal proceedings against them.

The Company has already borne substantial costs to satisfy these indemnification and expense advancement obligations and expects to continue to do so in the future.

We may need to increase these expenditures if we experience further delays in trial dates or other proceedings and our ability to recovery any of these advanced costs in the future is uncertain.

See Note 16, “ Commitments and Contingencies .”

In addition, all of our revenues from micronized products and AmnioFill, which accounted for $32.8 million, $42.4 million, and $68.4 million, and umbilical cord-derived products, which accounted for $16.6 million, $17.9 million, and $14.7 million, of our net sales for the years ended December 31, 2020, 2019, and 2018, respectively, are at risk upon the expiration of the FDA’s enforcement discretion, which is scheduled to expire on May 31, 2021.

Further, our liquidity is challenged by expected costs, investments in clinical trials to support BLAs, and contingent liabilities:

• We need to continue to invest in our manufacturing establishments to bring them into compliance with CGMP for production for our micronized products.

We are also pursuing opportunities to partner with a contract manufacturing organization.

The transition process includes development and enhancement of production processes, procedures, test and assays, and it requires extensive validation work.

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These efforts require human capital, expertise and resources.

– “ Risk Factors ” under the heading “ To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of new tissue products more expensive and would significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.”

– “ Risk Factors ” under the heading “ To the extent our products do not qualify for regulation as human cells, tissues and cellular and tissue-based products solely under Section 361 of the Public Health Service Act, this could result in removal of the applicable products from the market, would make the introduction of some new tissue products more expensive and could significantly delay the expansion of our tissue product offerings and subject us to additional post-market regulatory requirements.”

• The clinical program to support our BLAs will involve substantial cost.

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Pre-market compliance includes the conduct of clinical trials in support of BLA approval, the development and submission of a BLA, and the production of product for use in the clinical trials that meets FDA’s quality expectations.

See Item 1A - Risk Factors - “If any of the BLAs are approved, the Company would be subject to additional regulation which will increase costs and could result in adverse sanctions for non-compliance.”

We may become obligated to make payment in respect of certain contingent obligations in addition to our indemnity obligations to former officers and directors.

See Item 1A - Risk Factors - “Obtaining

and maintaining the necessary regulatory approvals for certain of our products will be expensive and time consuming and may impede our ability to fully exploit our technologies,” and “If any of the BLAs are approved, the Company would be subject to additional regulation which will increase costs and could result in adverse sanctions for non-compliance.”

• We are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings, and government enforcement actions.

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- Risk Factors - “We are currently, and may in the future be, subject to substantial litigation and ongoing investigations that could cause us to incur significant legal expenses and result in harm to our business.”

Even after the amendment of the BT Loan Agreement in April 2020, we remained subject to financial convents in the BT Loan Agreement that would have become more restrictive after November 30, 2020.

A breach of a financial covenant in the BT Loan Agreement, if uncured or unable to be cured, would likely have resulted in an event of default that would have triggered the lender’s remedies, including acceleration of the entire principal balance of the loan.

The BT Loan Agreement covenants are summarized below:

Financial Covenant

BT Loan Agreement

Amended BT Loan Agreement

(after December 31, 2020)*

Total Leverage Ratio

(tested quarterly)

minimum Liquidity Ratio

(tested monthly)

$30 million 4/2020 and 5/2020

Applicable Margin

interest rate)

3-month LIBOR + 8%

3-month LIBOR + 9%

*requirement would increase to $30 million effective November 30, 2020 (i.e.

for the month ending December 31, 2020);

requirement would decrease to $20 million so long as the Total Leverage Ratio is less than 2.5 to 1.

The relief provided by the April 2020 amendment generally would have expired at the end of 2020.

Further, we would have remained at risk of breaching these covenants during 2020 if we had another setback in our business, for example, if we experienced a second wave of the COVID-19 pandemic.

Also, if the Company’s net revenue decreased by more than 20% in 2020, the Company might have exceeded the applicable maximum leverage ratio permitted by the BT Loan Agreement during the second half of 2020.

A breach of a financial covenant in the BT Loan Agreement, if uncured or unable to be cured, would likely have resulted in an Event of Default that would have triggered the lender’s remedies, including acceleration of the entire principal balance of the BT Loan.

We might not have been able to repay all such amounts or be able to find alternative financing in an event of a default.

Even if alternative financing were available in an event of a default under the BT Loan Agreement, it might have been on unfavorable terms, and the interest rate charged on any new borrowings could have been substantially higher than the interest rate under the BT Loan Agreement, thus adversely affecting our cash flows, liquidity, and results of operations.

Acceleration of the repayment of the loan pursuant to the terms of the BT Loan Agreement, in combination with the Company’s current commitments and contingent liabilities, also could have cast doubt on the Company’s ability to continue as a going concern.

Moreover, as noted above, our revenues for 2020 were down as compared to revenues for 2019.

The COVID-19 pandemic makes it difficult to predict future revenues and there is no assurance that the COVID-19 pandemic will not continue to adversely affect revenue in 2020 or 2021.

• We may become obligated to make payments in respect of our indemnity obligations to former officers and directors.

We are subject to financial covenants in the Hayfin Term Loan Agreement, including a $10 million minimum liquidity covenant.

A breach of a financial covenant in the Hayfin Term Loan Agreement, if uncured or unable to be cured, would likely result in an event of default that could trigger the lender’s remedies, including acceleration of the entire principal balance of the loan as well as any prepayment premiums specified in the Hayfin Term Loan Agreement.

While we currently have sufficient cash to repay all such amounts in an event of default, we may require alternative financing to cover other obligations.

Even if alternative financing were available in an event of default under the Hayfin Term Loan Agreement, it might be on unfavorable terms, and the interest rate charged on any new borrowings may be substantially higher than the interest rate under the Hayfin Term Loan Agreement, thus adversely affecting our cash flows, liquidity, and results of operations.

Acceleration of the repayment of the loan pursuant to the terms of the Hayfin Term Loan Agreement, in combination with the Company’s current commitments and contingent liabilities, also could have cast doubt on our ability to continue as a going concern.

Moreover, as noted above, our revenues for 2020 decreased when compared to revenues for 2019.

The COVID-19 pandemic has made and may continue to make it difficult to predict future revenues in the near term, and there is no assurance that the COVID-19 pandemic will not continue to adversely affect revenue in 2021.

More specifically:

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• Because our sales are not evenly spread across the United States, to the extent that areas most impacted by COVID-19 are those where we have more of our sales, the pandemic will have a greater adverse impact on our revenues.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change, and we do not yet know the full extent of delays or impacts on our business, or how long such effects will endure.

As a result of these factors, there were doubts about our ability to continue as a going concern in the absence of the Preferred Stock Transaction and the Hayfin Loan Agreement.

Due to these factors and concern regarding the Company’s ability to continue to comply with the financial covenants contained in the BT Loan Agreement, in December 2019, we engaged a nationally recognized investment bank to act as sole placement agent for the purpose of managing any possible capital sourcing process.

After considering the Company’s uncertain ability to estimate cash from operations, the near and mid-term risks to the Company’s ability to generate cash, and anticipated future expenses and required investments, the Board, in consultation with management and the Company’s outside advisors, considered various financing alternatives.

The Company ultimately held discussions with more than 20 potential financing sources.

Throughout the process, the Board evaluated the risks associated with deferring any capital raising process, such as until after the filing of this Form 10-K and/or the relisting of our Common Stock.

After careful consideration, the Board unanimously approved the Preferred Stock Transaction and the Hayfin Loan Transaction.

• While vaccines have been approved by the FDA, the extent and speed with which the vaccine is available to the general population, as well as the general willingness to accept the vaccine when available, could influence the availability of elective procedures and, potentially, demand for our product.

• The ultimate impact of the COVID-19 pandemic is highly uncertain.

The duration and magnitude of these impacts on our business is uncertain.

Discussion of Cash Flows

Operating Activities

During the year ended December 31, 2020, net cash used in operating activities decreased $9.1 million to $30.3 million compared to $39.4 million for the year ended December 31, 2019.

The decrease in cash used was primarily attributable to year-over-year reductions in operating expenses, including those incurred in connection with the Audit Committee Investigation and related Restatement.

These effects were offset by legal settlement payouts, severance payouts to former executives, and interest payments on our various loan agreements.

During the year ended December 31, 2019, net cash (used in) provided by operations decreased approximately $75.2 million to $(39.4) million, compared to $35.8 million for the year ended December 31, 2018.

This decrease was primarily attributable to the effect of the change in revenue recognition policy of $17.4 million, an increase in accounts receivable of $10.9 million, as well as the $20.1 million decrease in cash related to the change in other balance sheet accounts in 2019.

During the year ended December 31, 2018 , net cash provided by operations decreased approximately $27.1 million to $35.8 million , compared to $62.9 million for the year ended December 31, 2017.

This decrease was primarily attributable to decrease in net income (as a result of higher selling, general and administrative expenses primarily as a result of the Investigation and Restatement), partially offset by a $6.6 million increase in accounts payable due to working capital management efforts.

During the year ended December 31, 2019 , net cash provided by (used for) investing activities increased approximately $9.7 million to $0.5 million provided by investing activities compared to $9.2 million of cash used in investing activities for the year ended December 31, 2018 due to the repayment of the note receivable from Stability, partially offset by a significant reduction in the equipment purchased during 2019.

During the year ended December 31, 2018 , net cash used for investing activities increased approximately $3.8 million to $9.2 million compared to $5.4 million for the year ended December 31, 2017 due to the higher equipment purchases in 2018 as compared with 2017.

Investing Activities

During the year ended December 31, 2020, net cash (used in) provided by investing activities was $(4.6) million of cash used compared to $0.5 million of cash provided for the year ended December 31, 2019.

Cash provided by investing activities in 2019 was driven by principal received on a note receivable from Stability, LLC for $2.7 million.

Exclusive of this activity, the change was driven by year-over-year increases in capital expenditures of $2.5 million.

The remaining difference is the result of year-over-year decreases in cash paid for patent application costs.

During the year ended December 31, 2019, net cash provided by (used in) investing activities increased approximately $9.7 million to $0.5 million provided by investing activities compared to $9.2 million of cash used in investing activities for the year ended December 31, 2018 due to the repayment of the note receivable from Stability, partially offset by a significant reduction in the equipment purchased during 2019.

Financing Activities

During the year ended December 31, 2020, net cash provided by financing activities was approximately $61.6 million a decrease of $1.3 million compared to $62.9 million for the year ended December 31, 2019.

Activity in 2020 was driven by the sale of our Series B Convertible Preferred Stock, for which we received proceeds of $92.5 million, net of stock issuance costs.

In addition, we received net proceeds on the borrowing of our Hayfin Term Loan of $46.3 million, net of deferred financing costs and original issue discount.

These proceeds were used to repay the outstanding principal and prepayment premium on our BT Term Loan of $73.4 million.

By comparison, activity in 2019 was driven by proceeds from our BT Term Loan of $66.1 million, net of deferred financing costs and original issue discount.

The remaining variance was driven by year-over-year increases in the cash paid for shares repurchased ($0.9 million), offset by increases in proceeds from option exercises ($0.3 million).

During the year ended December 31, 2019, net cash flows provided by (used for) financing activities was approximately $62.9 million compared to $(8.9) million during the year ended December 31, 2018.

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The Company did not otherwise repurchase any shares of our Common Stock during 2019.

During the year ended December 31, 2018 , net cash flows used for financing activities was approximately $8.9 million compared to $60.4 million during the year ended December 31, 2017.

The decrease was primarily due to lower share repurchases and lower proceeds from stock option exercises.

Non-GAAP Financial Measures

In addition to our GAAP results, we provide certain Non-GAAP metrics including Earnings Before Interest, Taxes, Depreciation and Amortization (“ EBITDA ”) and Adjusted EBITDA.

In addition to our GAAP results, we provide certain Non-GAAP metrics including Adjusted Net Sales, Earnings Before Interest, Taxes, Depreciation and Amortization (“ EBITDA ”), and Adjusted EBITDA.

We believe that the presentation of these measures provides important supplemental information to management and investors regarding our performance.

These measurements are not a substitute for GAAP measurements.

These measurements are not, and should not be used as, a substitute for GAAP measurements.

Company management uses these Non-GAAP measurements as aids in monitoring our on-going financial performance from quarter-to-quarter and year-to-year on a regular basis and for benchmarking against comparable companies.

Adjusted Net Sales

We provide Adjusted Net Sales to facilitate comparisons of sales between periods in which the method used to calculate our reported net sales varied.

Specifically those reported prior to and after the Transition, included revenue recognized on a cash basis and an “as-shipped” basis in the same period.

Refer to Note 2, “ Significant Accounting Policies, ” of the consolidated financial statements for additional details regarding the Transition.

Adjusted Net Sales provides comparative assessments of our revenue and assists in evaluating our sales performance.

Adjusted Net Sales consists of GAAP net sales less the effects of the Transition.

For 2019, this includes the Transition Adjustment and cash received from the Remaining Contracts.

For 2020, this reflects cash received from the Remaining Contracts.

A reconciliation of GAAP net sales to Adjusted Net Sales is provided in the table below (in thousands):

Year ended December 31,

2020 2019 2018

Net sales $ 248,234 $ 299,255 $ 359,111

Effect of change in revenue recognition (7,767) (29,604) —

Adjusted net sales $ 240,467 $ 269,651 $ 359,111

EBITDA and Adjusted EBITDA

We provide EBITDA and Adjusted EBITDA to facilitate comparisons to results of other companies.

EBITDA is intended to provide a measure of the Company’s operating performance as it eliminates the effects of financing and capital expenditures.

EBITDA consists of GAAP net income (loss) excluding:

(i) depreciation, (ii) amortization of intangibles, (iii) interest (income) expense and (iv) income tax provision.

Adjusted EBITDA is intended to provide an enduring, normalized view of EBITDA and our broader business operations that we expect to experience on an ongoing basis by removing items which may be irregular, one-time, or non-recurring from EBITDA;

EBITDA consists of GAAP net loss excluding:

(i) depreciation, (ii) amortization of intangibles, (iii) interest expense (income), (iv) loss on extinguishment of debt, and (v) income tax provision.

Adjusted EBITDA is intended to provide an enduring, normalized view of EBITDA and our broader business operations that we expect to experience on an ongoing basis by removing from EBITDA certain items which may be irregular, one-time, non-cash items not excluded when calculating EBITDA, or non-recurring;

most significantly those expenses related to the Audit Committee Investigation and Restatement.

This enables us to identify underlying trends in our business that could otherwise be masked by such items.

Adjusted EBITDA consists of GAAP net income (loss) excluding:

(i) depreciation, (ii) amortization of intangibles, (iii) interest expense (income), (iv) income tax provision, (v) costs incurred in connection with Audit Committee Investigation and Restatement, (vi) the effect of the change in revenue recognition on net income, (vii) share-based compensation, (viii) impairment of intangibles, (ix) loss on divestiture, and (x) one-time inventory fair value adjustments.

A reconciliation of GAAP Net Income (Loss) to EBITDA and Adjusted EBITDA appears in the table below (in thousands):

Adjusted EBITDA consists of GAAP net loss excluding:

(i) depreciation, (ii) amortization of intangibles, (iii) interest expense (income), (iv) loss on extinguishment of debt, (v) income tax provision, (vi) costs incurred in connection with Audit Committee Investigation and Restatement, (vii) the effect of the change in revenue recognition on net income, (viii) share-based compensation, and (ix) impairment of intangible assets.

A reconciliation of GAAP net loss to EBITDA and Adjusted EBITDA appears in the table below (in thousands):

Years ended December 31,

Net (loss) income

2020 2019 2018

Net loss $ (49,284) $ (25,580) $ (29,979)

Non-GAAP Adjustments:

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Interest expense (income), net 7,941 4,708 (527)

Income tax provision (benefit) expense

Loss on extinguishment of debt 8,201 — —

Income tax provision (benefit) expense, net (12,259) (5) 26,582

EBITDA (38,546) (13,292) 2,992

Additional Non-GAAP Adjustments:

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Impairment of intangible assets 1,027 1,258 —

Loss on divestiture

One-time inventory fair value adjustments in connection with acquisition

Adjusted EBITDA $ 30,623 $ 42,084 $ 69,082

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis